Most people only seek a loan when they are in dire need of funds. This money can be used for emergencies, a new car, and even home repairs. Whatever the reason a person needs the loan, it can be disappointing when they are denied. Thanks to the Equal Credit Opportunity Act, lenders are required to disclose reasons for denying a loan application. Here are three of the most common causes.
The first reason: credit reporting
The first thing a lender will do when someone applies for a loan is pull their credit report. Credit reports give a lender much more information than just a number. If a person has a large number of loans already outstanding, this may make the lender more cautious about increasing the person’s debt.
This credit report will also show the number of collection accounts, any accounts payable, and the payment history of the person applying for the loan. All of these are components of a credit report that can paint a picture of the lender, making them more likely to lend you money or decline your loan application.
Checking credit report discrepancies can solve a lot of problems for a potential borrower. If they find that there are items on their credit report that are not theirs, they will need to call and correct this.
The second reason: insufficient means of payment
Lenders must know that the money they lend will be repaid. When the borrower does not have sufficient income or means to repay the loan, the lender may be less inclined to grant that borrower a loan.
In the sheer amount of paperwork it takes to apply for a loan, the lending company will require the potential borrower to list their income and be willing to provide proof of the existence of the income. Having this evidence can help the lender justify lending money if there are any questions about why he or she has agreed to the loan.
Reason 3: Too much debt
Lenders take a good look at the debt-to-income ratio of a potential borrower before lending him any more money. If the lender sees that the person is already using 50% or more of their earnings to pay off debt, the lender may consider them a high-risk borrower.
Loans are not the only thing lenders will look at in terms of debt. The cost of living, credit cards, student loans, and group accounts all factor into how much debt a person has.
Hard money loans as an alternative
If a potential borrower wishes to attempt the loan application process again, correcting the reasons for refusal is the first place to start. After they verify that the information on their credit report is correct, reduce their debt-to-income ratio, and either add collateral to the loan or prove that their income is sufficient to support the debt, they can try again. The most important thing for borrowers to remember is that double checking accurate information is key. However, if the banks are still rejecting your application, then another option to get loans is through a private hard money lender. Hard money lenders offer loans based on home equity, so it’s a good alternative when banks won’t approve of you.