If you have ever applied for a loan and been denied credit, you know how discouraging that can feel.
Why does it happen? Below are some of the more common reasons lenders tend to turn down loans.
Keep in mind that all lenders are different, and the intent of this article is to give you insight into their thinking, not to discourage you from applying for a loan.
Credit report inaccuracies
Certain discrepancies on your credit report can lead to lenders denying credit. For example, if your credit report shows you have had late payments when indeed you have not, let your credit reporting agency and creditor know immediately.
Incomplete or incorrect loan application
If you entered information inaccurately about your employment, prior credit history, address, or anything else on your credit application, this can lead to a rejection of credit. The same goes if you did not complete the application. Make sure you fill out the application entirely and review it carefully for any missing information or errors.
A stable job usually means you have stable income, and stable income gives lenders a greater comfort level that you have the ability to pay them back. When a lender sees you have held down a job for several years, this indicates stability. If instead they see a sporadic job history, particularly with a recent history of gaps in employment, this can sway them away from lending you money.
Not enough income
If creditors notice that you don’t have enough income in relation to your debt obligations to pay them back, they will deny credit.
Credit report indicates bankruptcy
A bankruptcy on your credit report presents additional risk, and lenders will be weary of approving a loan. A Chapter 7 bankruptcy stays on your credit report for 10 years; a Chapter 13 stays on record for seven years. While investor guidelines vary, a bankruptcy in the last few years can present a challenge to obtaining credit.
Debt income ratio too high
This ratio gives an indication of how high your debt is compared to your income. To get this number, add your monthly debt payments and divide them by your gross monthly income. If your percentage is 43 or higher, you likely will be deemed a greater risk for lenders because your debt load is heavy in comparison to the money you are bringing in.
Credit card utilization
When your credit utilization rate is high, meaning you are using a large percentage of your available credit on all of your credit cards, you will be seen as a potential risk to lenders. A lower percentage usually translates to a better credit score. Credit-rating company VantageScore recommends a utilization rate of no more than 30 percent.
... So there you have it. Seven common reasons lenders decline to make loans. Just remember, if you’ve been denied a loan, you don’t need to give up. You can apply with another lender or make needed adjustments to your financial profile and try again.