FG. Loans/Grants

Why Your Loan Application May Be Rejected or Declined

Bill needed a loan of less than $1500 to make a deposit for the Caesarean section that his wife was going to have. Her contractions had begun one month before her due date, so the doctors recommended that she have an assisted delivery as soon as possible. It was more than just a loan in his eyes; it was a question of life and death. But things were different for Jane; she needed to borrow $2565 within the next five days or risk losing her place at an Ivy League university.

Both of them had submitted an application and were eagerly awaiting a response from the organization that would be issuing the certificate. Their reasons for wanting a loan vary, but it was very important to them. However, regardless of how important it was, the only thing that could determine whether or not they were approved for these loans was the predetermined financial rules.

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Individuals and businesses borrow money for a variety of reasons. Businesses borrow money for a variety of reasons, the most common of which include the need to improve their credit rating, meet the financial demands of their businesses, aid growth and expansion, boost working capital, reinvest for improved revenue, and so on. Individuals borrow money for more common reasons, such as to deal with health or medical emergencies, consolidate debt, or pay for educational expenses.

However, loans are frequently requested or accepted as a last resort, and as a result, a rejection affects the intending borrower in a variety of ways, most of which are not desirable. This is true whether the borrower is a business or an individual. However, despite the significance of a loan to a potential borrower, there are specific guidelines and principles that lending parties, including financial institutions (which are frequently referred to as “surplus economic units”), must adhere to in order to successfully issue loans.

If your application for a loan is denied, you may become curious about what steps to take next. However, it is most rewarding to first determine the reasons you were denied a loan, and what steps you can take, both currently and in the future, to prevent it from happening again in the future.

In this piece, we will discuss the factors that lead to the rejection of personal and business loans, with the goal of assisting you in recognizing these factors and avoiding them so that you can obtain the loan you need.

Below, is a summary of the 16 most common reasons a loan application may be rejected or declined:

  1. Low credit score, bad or unreliable credit history
  2. A high debt-to-income [DTI ratio] ratio
  3. Insufficient or unstable employment history
  4. Insufficient, inconsistent or unverifiable income cash flow;
  5. Missing important or incomplete information/paperwork within your application.
  6. Lack of collateral or credible guarantor
  7. Incompatibility of loan purpose with lender’s criteria
  8. Inability to meet the basic requirements
  9. Disqualification with other lenders
  10. Engagement in cyclical or arbitrage business.
  11. Lender’s personal assessment of your character and personality
  12. Unstandardized or Infeasible Business Plan or Proposal
  13. Prior indictments or legal standing
  14. Existence of overwhelming outstanding debts
  15. Unavailability of credit to the lending institution
  16. Government policy (ies).
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Now, we shall proceed and discuss them to provide better insight on avoidance, to ensure your loan application is successful.

1. Low credit score, bad or unreliable credit history

The lender’s perspective on previous loans is represented by the borrower’s credit score or history. It is a numerical expression that ranges from 300 to 850 and is based on a level analysis of the credit files of a prospective borrower. It represents and expresses the creditworthiness of the prospective borrower, regardless of whether they are an individual or a business. This is one of the most important determining factors, if not the most important one, in terms of whether or not your application will be successful.

The borrower’s chances of being approved for a loan improve proportionally with the borrower’s credit score. This information is derived from a person’s credit history and is dependent on a number of factors, including the total amounts owed, the number of accounts held, and the history of repayment, among other things. It is obtained from credit bureaus, which are authorized by law to share this information.

Credit scores are a common metric for lenders to use when deciding whether or not to extend credit to a potential borrower. There are financial institutions that do not publish their minimum credit requirements, but there are others that do. However, if your credit score is low (does not meet the particular lender’s minimum requirement) or there has been a report of default in the past against you, lenders may charge you a higher rate to compensate for the risk of you not being able to repay the loan, and it may also lead to an outright rejection of your loan application. If your credit score is low (does not meet the particular lender’s minimum requirement), or if there has been a report of default in the past.

 2. A high debt-to-income [DTI ratio] ratio

When calculating your debt-to-income ratio, the amount of money you owe each month is compared to the amount of money you earn each month. When deciding whether or not to approve a loan application, the vast majority of financial institutions look at the applicant’s ratio of total debt to annual income.

Lenders will add up all of your existing debt, then divide that total by your annual income in order to determine your debt-to-income ratio. For instance, if the total amount of your monthly debt payments comes to $7,000 and you divide that number by the amount of money you bring in each month, you will find that your DTI ratio is 77%.

Lenders may be concerned about your ability to repay your debts if your DTI ratio is particularly high and is comparable to the one shown above. It is recommended that one shoot for a DTI ratio of 35% or less, as this is generally regarded as being satisfactory.

If your DTI is too high, paying down debt will lower your credit utilization ratio, improve your debt-to-income ratio, and increase the likelihood that you will be approved for a loan. Your application for a loan may be denied if it is thought, given the level of your income, that you may not be able to adequately handle additional debt in the future.

3. Insufficient or unstable employment history.

This pertains in the most general sense to personal loans. Lenders place a high premium on sound financial management and give your loan application the serious consideration it deserves when doing so.

There is a good chance that your application for a loan will be denied if your past reveals that you have a history of frequently switching jobs or engaging in freelance work that is unstable.

This is due to the fact that the lender needs to establish that you will have a regular source of income in order to reduce the risk associated with lending money to you.

4. Insufficient, inconsistent or unverifiable income cash flow; especially as against the desired loan amount.

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In addition to the consistency of your income, lenders will look for proof that you earn money to ensure that you will be able to repay what you borrow. If your annual income is less than the minimum required by the lender, you may not be approved for a loan or you may be offered a loan for a lower amount with an interest rate that is possibly higher.

In general, lenders want to establish that the incomes listed on your application have been consistent in the past so that they can assume it will continue to be consistent moving forward. If you have recently changed jobs (within the past sixty days) or have freelance work from multiple employers, this may cause inconsistencies in the calculations that you use to determine your income. Other factors that may cause this include having multiple/different sources of income. It is not necessarily the case that your application will be rejected every time if you have an inconsistent income because you are self-employed or work seasonal hours. Even though the amount and timing of your paychecks may not be stable or predictable, some financial institutions may be willing to review your previous tax returns in order to evaluate your earnings over a more extended period of time.

Your application might be denied by the lender if your monthly income is insufficient to cover the amount of money you want to borrow, or if it seems likely to fluctuate from one month to the next.

5. Missing important or incomplete information or paperwork within your application.

An application for a loan will always require a number of forms of documentation, such as information regarding employment and income (which may include tax returns, pay stubs, or bank statements), a credit report, a form of identification issued by the government, and in some cases, documentation regarding collateral for either your company or yourself.

If any of these pieces of information are missing from your application, or if the information that you have provided about your name, address, phone number, and other account details is inaccurate, then you will almost certainly be denied. If important information or documents are missing from your application, a lender may decide not to approve your loan request.

Before you send in your application for a personal loan a second time, double check that all of the necessary paperwork is complete and accurate. It’s possible that you won’t end up using all of it, but it’s better to have it on hand just in case.

6. Lack of collateral or credible guarantor.

When it comes to loans, the borrower’s collateral serves as the lender’s safety net in the event that things do not go according to plan. Lenders require business owners to demonstrate a willingness to personally guarantee the loan or pledge personal assets with a value equal to the amount of the loan as collateral. This requirement is especially important when the risk associated with a loan is on the upside.

If you or your company are unable to provide the required security, your chances of being approved for a loan even if you do not have business credit are extremely slim.

7. Incompatibility of loan purpose with lender’s criteria.

There are many distinct categories and kinds of loans, and the majority of them, if not all of them, are geared toward either a specific industry or application. If you apply for a loan with a purpose that is different from the one you intend to use the funds for, your request will most likely be denied.

It’s possible that a lending institution prohibits gambling with or investing money that’s been borrowed from them (like for a student loan). Your application might be rejected if you specified a reason for the loan that falls outside the parameters of the rules imposed by the lender.

8. Inability to meet the basic requirements.

Every lender sets its own requirements, but most look for a few basic criteria, such as;

  • Borrower must meet the minimum age requirement (typically 18)
  • Borrower must be a citizen of a certain country (say U.S., Nigeria, U.K., etc.)
  • Prospective borrower must be employed with a valid bank account
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Before applying for any loan, ensure to review the basic requirements to ensure you meet them to avoid a decline of your loan.

9. Disqualification with other lenders.

Certain financial laws allow financial institutions to share data with the credit bureau, if a lender finds records of loan application decline from other credible lender, it becomes a pointer you a possible underlying issue and may prompt them to reconsider lending to you.

10. Engagement in cyclical or arbitrage business.

‘’Times change…’’ they say, but, no lender wants the ties to change on their money. They simply want you to pay your principal and interest!

Cyclical businesses are those that operate in a type of industry that is susceptible to the ebb and flow of the business cycle. As a result, cyclical businesses typically experience higher revenues during times of economic expansion and prosperity and lower revenues during times of economic contraction and ebb. Companies operating in industries that experience cyclical ups and downs can mitigate the effects of this type of volatility by implementing employee layoffs and cuts to compensate during difficult economic times, and by paying bonuses and hiring aggressively during prosperous economic times.

Unfortunately, this is not something that can be predicted, so entering into an agreement would involve risk on the part of both the lender and the borrower. Because of this, they can be a liability during certain times of the year, and if the owners of such businesses apply for loans, the lender would be taking a significant risk if they approved their application.

11. Lender’s personal assessment of your character and personality.

Before deciding whether or not to approve a borrower’s request for a loan, creditors evaluate the applicant’s history and priorities to determine whether or not to do business with them.

Lenders and borrowers enter into a relationship the moment they sign an agreement, even if the partnership between them is not formally established, and no one ever has the intention of being in a “toxic” partnership.

The majority of lenders will even conduct a background check on your character. If the lender discovers that you would be a toxic partner, they will most likely deny your request for a loan rather than taking the risk of doing business with you. This is due to the fact that there are many other business owners who have a good character who are in need of the loan.

12. Unstandardized or Infeasible Business Plan or Proposal.

If you are borrowing for a business. Lenders must be convinced of your overall business strategy as well as the reason you need investment. If your business model is considered unsound, your loan application may be denied.

13. Prior indictments or legal standing.

Prospective borrowers or people/businesses who have been penalized by the law for financial misdemeanor will most definitely be a red-flag to any responsible lender.

14. Existence of overwhelming outstanding debts.

Banks and certified lenders can access your financial profile even if you have availed loans from third party banks/credit institutions.

And while it is not against standard practice to reject the loan application from a borrower who is already owing a loan elsewhere, however, the borrower must be able to demonstrate financial capacity to handle both loan, otherwise, your likelihood of getting the loan decreases.

15. Unavailability of credit to the lending institution.

Credit institutions are also subject to the economic realities of the economies they operate in, and no matter how they wish to honor loan applications, if credit is unavailable to them, they may not be able to lend.

16. Government policy (ies) and or legal prohibitions.

Banks and other credit-issuing institutions operate under the framework of the law.  Central banks control the economy using financial institutions. Financial laws might place certain restrictions on institutions or the category of borrowers it can attend to, an intending borrower might be affected in this category and therefore have their loan application rejected.

So, these at the main reasons your loan application may be rejected, study around them and prepare adequately to enable you to get that much-needed financing today!

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