Nobody wants to read these words, “Your loan application is rejected.” Unfortunately, that is the reality of eighteen per cent of Australian borrowers who have applied for a loan.
According to a recent survey, one in five Australians has had their home loan application rejected. One in ten has been denied a loan in the past by the big four banks. That is a significant number of people who cannot access credit.
Here are some of the top reasons financial institutions turn down loan applications from potential borrowers.
Poor credit history
A credit track record is by far the most critical signal banks rely on to decide whether to accept or decline a loan application.
A high credit score of say 750 is desirable. A high score shows the bank the borrower is reliable, has a steady source of income and can repay the loan on time.
A low credit rating of say below 610, on the other hand, could mean there are inherent issues with the borrower’s finance. If the prospective borrower has defaulted on previous loans or has filed for bankruptcy in the past, they could count against them when applying for a new loan.
Your credit history indicates how well you have managed your finances in the past. So, before applying for a loan, you may want to find out your credit history to boost your chances of getting approved.
While you are rebuilding your credit, you can still apply for a loan even with bad credit. However, you will have to dig a bit deeper to find alternative loan providers who offer loans for people with bad credit.
Debt to income ratio
Another common reason why banks turn down loan applications is the debt to income ratio of the applicant.
Banks use the debt to income ratio to evaluate whether a borrower can comfortably repay the loan without negatively impacting their standard of living.
To calculate your debt to ratio, the bank will divide all your recurring monthly debt commitment by your net income after deducting tax.
The implication is that even with a perfect credit score, your loan application can still be rejected if you carry a lot of other debts.
So, to ensure a more friendly debt to income ratio, you may want to list all your income in the application form.
Several loan requests made in the past
For each loan request you make, the lender will first retrieve your credit history to access whether you are a suitable candidate for the credit line or not – this credit check is called a hard inquiry. And usually, these checks are entered on your credit report.
The problem starts if you have applied to several lenders within a short period as these hard inquiries stack up and can impact your credit score.
Lenders, interpret these hard inquiries as a sign that you are in financial distress and hence a high-risk customer which would, in turn, lead to a decline of your loan application.
Mistakes while filling loan application forms
A single mistake or misrepresentation of facts or failing to submit all necessary paperwork could lead lenders and credit providers to decline a loan application.
Please pay close attention when filling the income document as it is usually a common area where a loan application may be rejected. Lenders will often require that you provide several months of income statement from which they would make their decision about the stability of your income.
Your employment history also plays a role in whether your loan application is declined or accepted.
For example, the survey referenced above shows that twenty-six per cent of potential borrowers were turned down for being either self-employed or a part-time worker.
Lenders consider how long you have been in paid employment when making decisions on your loan application. So, if you are relatively new in your job or often changing jobs, your application is likely to be declined.
So, there you have it. Some tips on how to avoid your loan application being rejected.
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