When your loan application gets denied, it’s easy to start thinking that the lender has something against you. Sometimes, you might feel upset and stressed if you’re relying on the loan to get out of a tight situation. You may not only wonder why the lender doesn’t like your profile, but you might also ask yourself, “So, what do I do next?”
To give you the answers you need, we look at the reasons your loan application was rejected, and we provide you with the steps you can take to increase your chances of getting a “Yes” on your next application.
Possible answers to why your loan was denied
Before you can fix a problem, it’s important to find out the root cause. Most of the time, the lender will save you time by explaining why they rejected your application. Here are some common reasons why your loan application might be turned down:
Problems with your credit
When credit providers offer their services, they also expect to make a profit. However, there is risk involved when you lend a person money because they might not return it, which counts as a loss. If lenders consider you to be high risk, they will charge you a higher interest rate or decline your loan application altogether. To calculate the risk you pose, lenders usually check your credit history or credit score, and if they find the following problems, your loan application is likely to be rejected:
- Low credit score – This shows you have a past behaviour of not paying your debts as agreed.
- Insufficient credit history – If you have little or no credit history, the lender won’t have enough information to decide whether you’re creditworthy.
- Too many debts – These typically strain your budget and leave you with a high debt-to-income ratio. Basically, the lender compares what you earn with the amount you owe and decides that you can’t afford another loan.
- Too many credit enquiries – Your credit history shows how many times you have applied for a loan. Too many applications might lead the lender to think you have money problems, and they will consider you to be high risk.
- Negative judgements – Negative information such as a court judgement, sequestration, or debt review usually serve as a warning to other lenders you approach in the future.
Problems with your income
Lenders also use the details of your income to carry out an affordability assessment. As an example, if you earn a regular monthly income of more than R10,000 and are permanently employed, your chances of approval are higher. The lender has confidence in your ability to make the required monthly repayments compared to someone who earns less or who is a contract worker.
Problems with information on your application
If you submit a loan application form with incomplete or wrong information, you may not be approved. Lenders usually use your personal, employment, and financial details to verify your identity and check whether you qualify for the loan.
Your loan purpose is not approved
Depending on the loan type, some lenders usually ask why you’re taking out that particular loan. If it’s a personal loan, the lender may not want you to use the funds to start a business or buy Bitcoin (even if the ideas seem sound).
You don’t meet the requirements
Different lenders have different requirements you have to meet to qualify for their loans. Generally, the requirements for taking out a loan include having a South African ID, bank statements, payslips, and proof of address. Failure to meet some of these loan requirements may result in a rejected application.
What can you do to get your loan application accepted?
Now that you have the why, it’s time to work on getting your next loan application approved. How and what can you do to lower the risk you pose to the lender, so they’re more willing to advance the cash you need? Here are some actions you can take:
Work on your credit score
Having a positive credit history and an excellent credit score not only increase your approval chances, but they also help you get lower interest rates when you get approved. There are several ways to improve your credit score:
- Stick to the due date when paying all your debts and instalments – This helps you establish a good track record and improve creditworthiness in the long term.
- Build your credit score – To create some proof of your ability to manage debt, you can get an affordable credit card that is easy to pay off.
- Fix errors in your credit report – This requires you to obtain a free copy of your credit history so you can update and correct any negative information that is lowering your credit score.
- Limit your loan applications – It’s best to apply for a loan you can afford and qualify for. This prevents too many enquiries from showing up on your credit history.
Settle your other debts first
Paying off your existing accounts is a long term approach that reduces your debt-to-income ratio. In other words, when you pay off some of your loans, you create more room in your monthly budget where a new loan can fit. That means you’re now in a better position to afford the monthly repayments for that loan.
Apply for a secured loan
Using your property or vehicle to secure a loan increases your chances of approval. In this case, the lender can always take the property or car from you if you fail to repay the loan. The lender is, therefore, more willing to take the risk and approve your application.
Provide a deposit
For vehicle finance and home loans paying the maximum deposit amount can increase your chances of approval. By paying a deposit, you reduce the amount you have to borrow, which makes the loan more affordable. If the lender is sure that you can afford the monthly repayments, you’ll be more likely to get approved.
Get a co-signer
This can be a relative or close friend who makes a joint application with you. This person will also be responsible for repaying the loan if you are unable to do so. If your co-signer is more qualified than you or has better credit, then the lender has a higher chance of recovering their money. Hence, they’ll be more willing to make you a loan offer.
Approach a different lender
You can try your luck with a different lender, especially if they specialise in offering loans suited to your particular situation. For example, if your problem is having low credit, or being self-employed, there are various lenders who advertise their services for this type of loan applicant.
There are some services such as CreditGenie that assist people in repairing their credit score and to consolidate their loans.
If your loan application is rejected, the important thing to realize is that most reputable credit providers in South Africa aim to protect both you and themselves. To become a more responsible borrower, follow the advice in this article as much as you can. This way, you’ll lower the risk the lender has to take, which automatically increases your chances of getting your loan application approved.
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