Common Reasons For Installment Loan Rejections

One of the most common obstacles borrowers face in taking out a loan is loan rejection. Not only will it affect their credit record with the visibility of the hard inquiry made by the lender, but it will also not help them solve their current financial problem. 

In 2020, 21% of individuals were rejected for a loan application in general, including installment loans. To increase your chances of approval when you apply for a loan, here are the things that you need to consider that will surely affect the lender’s decision. 

Low Credit Score

A low credit score is the most common reason for a disapproved loan application. A person’s credit score is the most significant factor lenders consider when deciding whether to approve an application or not. 

Keeping your credit history clean is crucial to be able to find the best loan option available. Your credit score is affected when you have multiple late payments, defaulted on a loan, or filed bankruptcy. 

Check your credit score first before you apply for a loan. Look for any problems that are listed in your credit history. If you see that you have a bad credit standing, it is best to work on it as soon as you can. 

Low Income

Another factor lenders look at when you apply for a loan is your salary. Lenders carefully analyze your profile, especially your financial background. A low salary is a red flag for lenders as it indicates that you are not financially stable to pay the loan. 

If you cannot meet your living expenses with your income, what more in fulfilling your loan obligations? Hence, it is best to look for another income source to increase your chance of getting approved with your loan. 

Reason For The Loan

In the process of applying for a loan, the lender may ask you about the purpose of your loan. Lenders will more likely approve if your loan purpose is for debt consolidation or home improvements. 

If your loan purpose is to pay for your vacation, you will surely get disapproved of. Make sure the reason for your loan is valid and reasonable for a higher chance of approval. If you need money for unnecessary expenses, it is not advised to get a loan. 

Incomplete Information

Incomplete information could lead to disapproval of your loan. Make sure that the information on your loan application is correct and complete. Double-check the application before submitting it.

The information you provided on your loan application proves your credibility. Lenders will decide to approve or disapprove your loan application based on the information you provided. Even if you have a good income source and a good credit score, if you provide insufficient information, your application will quickly be rejected. 

Multiple Credit Inquiries

Credit inquiries are credit checks. Soft inquiries will not reflect on your credit history, but hard inquiries do. Hard inquiries happen if you applied for a loan or a credit line, and the financial institution requested a credit check. 

If you have multiple hard inquiries on your account, it indicates that you have applied to multiple financial institutions, whether for a loan or a credit line. If there are multiple hard inquiries on your account over a short time, your loan application will certainly get denied.

Lender Mismatch

Choosing where to apply for a loan will also have a huge impact on an approval. If you apply for a loan from a major bank and do not have a good credit score, you will be disapproved right away. 

There are smaller financial institutions that consider awarding loans to bad credit individuals. Online lenders are the ones who will most likely approve your loan application despite your credit history. These lenders offer no credit check loans to borrowers with bad credits. 

What to Do When You Get Disapproved?

If you have been rejected with your loan application and planned to re-apply, there are things you must do first. 

• Figure Out What Went Wrong

Use the list provided earlier to identify what caused the disapproval. Knowing what went wrong on your previous application is important before submitting another one. You can ask the lender about the reasons for your disapproval. 

Lenders will disclose what happened to your application and why it was disapproved. The lenders must provide their applicants a notice of adverse action where it contains the reason behind the disapproval. 

• Improve Your Credit Score

The best thing to do after a loan rejection is to improve your credit score. The higher your credit score, the more likely you’ll get approved on your next loan application. 

Take note of the many factors that affect your credit score. These are credit age, a mix of credit, payment history, new credit, and credit utilization. Your payment history and credit utilization is the most important factor of all as they make up 70% of your credit score. 

You can quickly improve your credit rating if you pay your debts on time and decrease the amount of your debt. Check your debt-to-income ratio and make sure it ranges between 15% to 20%.

• Consider A Cosigner

If you want an easy solution to your loan problem, consider bringing in a cosigner on your next attempt. First, you have to make sure that the cosigner approves and knows the risk associated with being a cosigner. 

Choose a cosigner who has an excellent credit score. The cosigner has equal responsibility with the borrower, which means the cosigner will pay the debt if the applicant fails to do so. 

A good credit score means that your cosigner is capable of repaying your loan if you could not manage to pay. If the cosigner also neglects the obligation associated with being a cosigner, their credit score will suffer. 

Recap

Being disapproved of for a loan means you can’t re-apply. What you need to do is to focus on the problem first before submitting a new application. Do not get discouraged if your first loan attempt gets disapproved. Many borrowers get disapproved at first but succeed in their next attempt. Just make sure to avoid the common reasons for the disapproval and follow the tips given to improve your approval rate next time.