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Why Might a Loan Application Be Declined?

Photo by Daniel Thomas on Unsplash

There are multiple reasons that a loan application might not be approved, mainly surrounding income and credit scores. There are no repercussions when it comes to having a loan application declined, and though it can be frustrating, it is possible to fix any issues surrounding an application and apply again.

Here, the reasons why a loan application may be declined have been outlined alongside ways in which an applicant could better their chances of approval.

Income

Income is one of the most common reasons that applications for loans are declined. Typically, if a loan application is rejected based on an applicant’s income, it may be that the income does not meet the lenders’ requirement. Lenders do not always publish the minimum income required to access a loan, meaning that applicants may be left wondering what the issue with their application was.

Debt-to-income Ratio

An applicant may also have their application for a loan denied if they have a high debt-to-income ratio. This ratio can be calculated by successfully dividing monthly debt payments by monthly income. In order to resolve this problem, an applicant should focus on paying off debts to reduce the ratio. This should give a lender more faith that the applicant will be able to repay any money lent to them in the agreed timeframe.

Credit

Loan applications can also be denied based on the credit score of an applicant. When considering a loan application, lenders will assess a borrower’s credit score to check that they feel comfortable that they are reliable when it comes to borrowing money.

A high credit score indicated to lenders that the applicant is reliable. A low credit score however will signal to the lender that the applicant may be a high-risk borrower. Credit scores are based on a number of factors: overall credit history, amount of accounts which a lender has open, overall debt levels and repayment history.

Each lender may have a different criteria when it comes to assessing an applicant. This may differ based on the lender’s willingness and regulations surrounding risk, where the company is based and what their lending practices are.

Will Being Rejected for a Loan Affect a Credit Score?

Being denied a loan will not affect an applicant’s credit score. In spite of this, an inquiry will be posted to the consumer’s credit report if a lender asks a credit bureau to access it. When applying for credit, the lender will usually run a hard credit enquiry, which may knock around 5 points from the credit score. This will usually only last for around two years, although being denied a loan will not further impact the overall score.

How to Improve a Credit Score

There are various ways to improve a credit score, including good management of household bills, being on the electoral roll, having a credit card and opening a bank account.

Managing household bills can help applicants to build and maintain a good credit history. Paying rent and other bills on time can help an individual to improve their credit score and simultaneously demonstrate to a lender that they are reliable and responsible when it comes to repayments.

Being on the electoral roll is completely free and helps an individual to improve their credit score. This is possible whether an individual lives alone or in shared accommodation, but lenders can use this registry to confirm an applicant’s address.

Having a credit card can also be beneficial for an individual looking to improve their credit score. If paid off on time and on a monthly basis, lenders will be able to see that an applicant can pay off debt reliably and therefore that they are more likely to meet repayment dates.

Opening a bank account that is well managed can help to show a lender that an applicant is financially stable and reliable. If the account has an overdraft, it is advised not to use it where possible and pay it off as quickly as possible if it is used.

Written by Marcus Richards

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