Why Is My Loan Denied?
It can be very disappointing to be denied a loan, especially when you needed to borrow money urgently. There are many reason why you need a loan fast, such as buying a house, a car or to pay for education. These are important milestones in life and we should try to get financing approved despite being denied by the first lender we approached. Indeed, there are several available options when your loan gets denied. To ensure better success, you need to understand why your loan application is turned down by the lenders. This allows you to fix any problems and prepare yourself to be in better standing the next time you apply for a loan.
Bad Credit – Many people cannot get a bank loan because of bad credit scores under 600. Prospective lenders will compute your FICO score using your credit report maintained by the central credit monitoring agencies Experian, Equifax, and Transunion. This credit report contains information on your debt payments as submitted by your lenders and creditors. If you have defaulted on your loans or made late payments etc, your credit score is reduced and some lenders may consider you to be a high risk borrower and thus deny you a loan. These negative remarks will appear on your credit report for months or even years, which is why it is important to take your loan payments seriously. This is the lenders’ industry standard for checking your credit worthiness whether you need financing for a car, or student loan.
Note that if you have never taken a loan or credit card, you probably have no credit history. This is typical for students and young working adults. Unfortunately, lenders may also deny you a loan because you have no credit history.
Low income / Unstable Income – It is unreasonable to ask for a $1 million dollar loan when your annual income is only $15,000. Lenders will check whether you can pay back the borrowed money with interest, and they may either deny your loan application or reduce the maximum amount to a smaller number. If you cannot prove that you have a stable income, it can be difficult to get a bigger loan than $500.
Too much debt – Sometimes, you cannot get a loan even with a high income. This is because the lenders found out that you have a very risky debt-to-income ratio. Your existing debts such as credit card balance, mortgage, car loan payments etc can prevent you from getting a new loan when the debt-to-income ratio (DTI) exceeds 50%. At this DTI level, most lenders question whether you can meet all debt obligations since almost all of your monthly pay check will be used for expenses and existing loan payments. You may need to completely pay off some loans before you can get a new loan.
Minimum Down Payment – This applies on secured loans when you are buying a home or car, where you make an up front down payment and borrow the remaining required to make up the selling price. The lenders want borrowers to have some equity in the home or car before they approve the loan. This is proven to reduce the probability of default since you will lose your down payment or existing equity in the home.
How To Get Unsecured Loan Approved With Co-Signer
Many people cannot get an unsecured short term loan because of bad credit or no credit. To get around denial from unsecured loans, the best option is to use a co-signer. This can be a friend, your parent or someone with good credit. A loan co-signer will sign on your loan agreement and will be responsible for paying the loan if you default. Many young people rely on their parents or guardians as co-signer for their student loans.
A co-signer works well for both borrower and lender. The lender assumes lesser risk since there are now two persons responsible for paying back the loan. The borrower enjoys cheaper interest rates because the loan is approved based on the good credit score of the co-signer.
The problem in getting a co-signer is trust. Not many people will be willing to co-sign your loan because they will be legally bind to the loan contract. They risk having to take over your loans and damage to their own credit score. That is why co-signers are usually family members or close friends.
When lenders turn down your loan application, the fair credit act mandates that they must disclose why they deny your loan. This information can be useful because it tells you the exact problem whether it is caused by poor credit history, insufficient credit, existing debts etc. You can fix these problems so that you are better qualified for a cheap loan in future.
Bank Loan Denial Due To Bad Credit
If you cannot offer any loan collateral or co-signer to secure a loan from banks or credit union, your remaining option is the bad credit money lenders. The danger with taking high risk loans for bad credit is that you actually increase your chance of a downward spiral towards debts and bankruptcy. This usually starts with poor money management, lack of personal savings and uncontrolled use of credit cards. Never take out a no credit check installment loan to pay off your credit cards, because the interest rates on your second loan is usually higher than the first making it even more difficult to pay off and become debt free.
The only time to resort to a high risk unsecured loan is for real emergencies, where not having the money will cost you worse off than the interest rates demanded by these money lenders. You should limit the maximum amount borrowed from bad credit loans, not more than $3000 and try to pay it off within 6 months.