There is no doubt that you need money to solve the problems of your life. It is likely that you come across an emergency and you have run out of money. Short-term loans can be an ideal option when you need money urgently. It is easy to apply for personal loans because you need neither guarantor nor collateral, but there are chances of rejection of these loans.
A lender always takes into account various factors before approving your application, which may include your income and credit score. If they doubt your repayment capacity, they may reject your application. It is natural that it will hurt you, but you do not need to go berserk. Instead, you should find out why your application got rejected.
Here are the significant reasons for the rejection of your personal loan.
Poor credit rating
Personal loans are unsecured, which means you need neither guarantor nor collateral. It increases the risk of default. Of course, a lender will estimate your repayment potential to make sure that you will pay off the debt on time.
A lender runs a credit check to look over your payment history. If your credit score is poor, the lender will turn down your application undoubtedly. Your credit score tells whether it is worth lending you money. It reflects your behaviour to your financial obligation.
However, your credit score can be disappointing despite timely previous payments. Errors in your credit report may account for it. Identity theft and incomplete record can pull your credit score. It is essential to peruse your credit report before applying for the loan to minimise rejection rate.
Even though your credit score is stellar, the lender may reject your application if you do not have sufficient income. Remember that you will have to pay interest on top of the principal. After the initial-stage approval, the lender will go through your income statement to determine net worth.
Approval chances are high if you are left with enough money after meeting all of your regular expenses to pay down your debt. Before you apply for a personal loan, make sure that you have enough funds to manage monthly instalments.
Prior rejection is also one of the reasons for rejection of personal loans. If one or more of your loans have been cast aside, your credit score will go down. As a result, the lender will likely reject your loan application.
Further, multiple times application for a personal loan allows for an interpretation that you are in dire need of money and it is likely that you will default on the payment. The rule of thumb says that you should not frequently apply for loans. If any lender dismisses your application, you should figure out reasons.
Frequent job changes
Job stability is a must to have a lender signed off on your personal loan. Your current income sources help a lender to know whether you can afford the loan or not. They require a minimum employment tenure. It acts as an assurance that you can sustain your loan unless the length of the loan comes to an end.
Of course, a poor employment record will not help you have a loan approved because the lender will not consider you a responsible borrower. Most direct lenders require borrowers to be employed for at least a year in the same company when they put in the loan application.
Your existing debts are high
It is not set in stone that you cannot take out a personal loan if you have other short-term loans, but they must not be too high that indicates you will not be able to afford payments of your personal loan. The debt-to-income ratio should be as low as possible. It should be more than 10% if you want to have a personal loan approved. If it is too high, consider paying your existing debts first.
You are applying more than your affordability
The desired loan amount can be a reason for the rejection of your personal loan. It is likely that you have asked for a higher amount than your affordability. A lender will go through your income statement to estimate your affordability. Do not make this mistake whenever you apply for a loan. Check how much you can borrow beforehand.
Submitting the right document that shows your eligibility and affordability is crucial to have a loan approved. Make sure that you fill out the complete loan application form and submit the required documents to prove your repayment capacity.
The final word
Getting a personal loan is not difficult as long as you have a good credit history and repayment capacity. Some direct lenders such as British-lenders can allow you to have these loans despite poor credit rating at competitive interest rates. Before you apply for personal loans, make sure that your credit report does not consist of errors and your debt-to-income ratio is low.