Seeing the loan application declined is an unpleasant experience, but it is not very uncommon for the most especially for the people borrowing the first time. The loan application acceptance and rejection depend upon various factors. You are lucky for being a Brit because the UK has a worldwide famous direct lending marketplace. Also, you have multiple Govt. sponsored schemes also that provide financial support during tough time. However, the numbers of loan application rejection or the rejection of financial help application at Govt. agencies are considerably high despite the 90% acceptance claim by the prominent direct lenders in the UK.
7 Reasons That Make Your Loan Application Declined:
- Inadequate income for repayment: Monthly income and financial liabilities are the essential factors that lenders assess compulsorily. Just having a large deposit or some asset doesn’t automatically mean that you are capable of repaying a new loan on time. The new responsible lending legislation encourages all the lenders to be sure that borrower is capable of paying back the debt. The repayment capability for each new loan is called ‘borrowing power’, and it is different each time.
- Unstable employment: Lenders want to see the borrower in a stable earning position to meet the scheduled repayments. If you are a sole earner in your family, lenders become more cautious. Changing jobs too frequently and joining a new job recently go against you. The gaps in employment also cause a decline in a loan application. Irregular income often becomes the cause of loan denial.
- Very low credit score: It is the most influential factor in loan application rejection or approval. You need to have a good or average credit score to prove yourself as a responsible and capable borrower. There are three credit ranking agencies in the UK, and direct lenders use a different one as their choice. Credit report states your previous performance in debt paying.
- High debt-to-income (DTI) ratio: According to the Consumer Financial Protection Bureau (CFPB), the total monthly debt liability shouldn’t be more than 43% of monthly income. If you have already passed that ratio, the lenders tend to deny loan application. The good DTI for high approval rate is 30% to 40%. For example, For example, if you make £ 4,000 / month and pay £ 1,500 towards debt/month, the DTI ratio will be £ 1,500 divided by £ 4,000 that comes around 37.5%.
- High credit usage ratio: Credit utilisation is often looked independently. It is a credit amount used in comparison to the credit amount available. For example, if your credit card limit is £ $7,500 and you owe £ 7,000, the credit utilisation ratio is 93%. High credit utilisation ratio goes against your favour. According to Experian, the ideal credit utilisation ratio is 30% or even less.
- Application error: It is essential to fill up the loan application with the utmost care. Even the small mistakes on the form may cause a denial. Check all the fields repeatedly and carefully. The standard errors found in loan applications are wrong name spelling, wrong address, absence in electoral register, wrong bank account etc.
Many other reasons may also cause your loan application denial, but the direct lenders tend to lend to most of the borrowers, but your credentials affect the cost.
What to Do If Your Loan Application Is Rejected:
Here are some tips that may help you get a better rate loan from another lender if your application is rejected by one lender:
*Ask the reason for loan application rejection: Contact the lender to know the reason for application rejection. Some will share the real reason while some may not, but you can’t compel them to do so. Still, knowing is better than assuming.
*Keep your credit file up to date: Check and keep the credit report up to date. If you see anything unfamiliar on the report, take immediate action. A credit score is the most crucial factor in decision making for lending; you should focus on improving it. Not necessarily you need funds to improve it, but, you can do it otherwise also by smart tricks. For example, ask the credit card issuing agencies to raise the credit limits but with soft pull inquiry. Similarly, charging inactive credit cards with a small amount also improves credit score.
*Apply for a loan elsewhere: All lenders assess the risk differently by using different credit ranking agencies and tools, so, just because your loan application has been denied by one does not mean that another lender too will reject your application. However, the next request should be applied after removing the probable cause like low credit score and error in information etc. If borrowing is imperative, apply to other direct lenders sooner because all the hard credit inquiries happened within 30 to 45-days period are reported as single credit inquiry that means loan application delivers less impact on credit score.
Although the lenders evaluate your credibility on various parameters, credit score is the most important among those. If your application is denied at one lending agency, don’t be hopeless; doors are still open. Just focus on improving your credit score by doing the best that you can do with limited funds in hand.