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Loan Application: What to do When Rejected

You may be in need of urgent cash and have filled out that loan application, but what do you do when rejected.

A loan is a form of debt incurred by an individual or other entity. The lender, usually a financial institution, or government, advances a sum of money to you, the borrower.

In return, you agree to a certain set of terms including any finance charges, interest, repayment date, and other conditions.

Although the loan application process for personal, payday or business loans has been simplified, once every while, your application may get rejected.

Why your loan application may get rejected

There are several reasons why your loan application can get rejected and most of them have to do with you.

The following are some of the reasons you can be denied a loan.

Poor credit history

When it comes to loans, your credit history is the number one factor lenders consider.

Your credit history is the primary way lenders evaluate how likely you are to repay or default on a loan.

If you’ve had bad credit reports in the past or you have a poor credit score, chances are that your loan application may be declined.

Using the nairaCompare credit checker tool, you can know your credit report and find out how to improve it.

High debt-to-income ratio

Your loan application may be denied if your debt-to-income ratio is too high.

A debt-to-income or DTI ratio is the sum of all your debts divided by your monthly income.

Generally, a low DTI should be under 40%. It signals to lenders a healthy balance of debt to income.

To calculate your debt-to-income ratio, add up all your current loans and divide them by your income.

Unstable employment history

If you have different pay slips, recently changed jobs, or have freelance work from multiple employers, it may raise a red flag in your loan application.

Lenders generally want to see that any income listed on your application has been consistent, so they can assume it will remain so moving forward.

Minimum income requirement not met

Every loan offer comes with a minimum income requirement. In addition to income stability, lenders look for proof of income to verify you have the ability to repay what you borrow.

If your income is below the lender’s threshold, you may be denied or offered a loan for a lower amount.

Loan purpose mismatch

Personal loans provide a lot of flexibility with regards to how you can use the funds.

However, some lenders may not allow you to access loans for certain things outside their scope like making investments, or anything illegal or partially illegal like gambling.

Make sure the loan application matches your purpose.

Missing information

There are key requirements with every loan application that cannot be ignored. The lender needs to establish your identity, proof of residence and proof of employment among other things.

Examples of such necessary information could be a credit report, government-issued ID and in some cases collateral.

If you are missing some of this information you are essentially guaranteed to get denied.

What to do when your loan application gets declined

Receiving the rejection notification is not the end of the world.

If your loan application was denied for any of the reasons above, here's a short checklist of action items you can go through to improve your chances of being approved next time.

1. Why was it declined?

Any lender who denies a loan application is required to send an action notice, which lists the reason(s) your application was declined.

The very first thing you should do is understand why you were declined for a personal loan.

2. Improve your credit report

One of the main reasons why loan applications get rejected is poor credit reports.

A person is considered to have bad credit if they have a history of not paying their bills on time or owe too much money.

Bad credit is often reflected as a low credit score, typically under 580 on a scale of 300 to 850. People with bad credit will find it harder to get a loan or obtain a credit card.

Also, you may need to check your credit report for errors and dispute any inaccuracies with the credit bureau about your personal finance history.

3. Pay off existing debts

This is applicable in a situation where your debt-to-income ratio is high.

If you have multiple loans, you are paying off, the chances are that your loan application will be rejected.

Don’t be quick to reapply. Make effort to pay off what you owe before applying for another loan.

4. Evaluate your track record

What is your loan history like? Did you pay off your previous loans when due or have you built a record of always making late repayments?

Lenders want to know that you can repay a loan and that you will repay a loan. Having a history of late repayments makes it much harder for you to qualify for a loan.

Asides from looking at your personal credit score, most lenders will also look at your business credit profile when evaluating your creditworthiness.

5. Apply for a smaller loan amount.

Consider asking for a smaller personal loan than what you need or asked for previously.

A smaller loan will appear less risky to a lender and may help improve your overall DTI which could help you qualify.

Applying for less than you need may turn out to be the more financially responsible path especially as it can help build your creditworthiness.

6. Try other platforms

Before beating yourself up over your loan rejection, understand that not all lenders have the same lending criteria and requirements.

Try other platforms and compare several loans offers against each other, you just might find what you need.

nairaCompare is a great resource for comparing loan offers. With its comparison tool, you can easily compare loans side-by-side and find the one that’s best for you. It makes your application seamless and saves you time and energy.

How to boost your credit score

Credit scores are calculated using the information found in your credit reports.

There are three credit bureaus in Nigeria licensed by the Central Bank: CRC Bureau Credit Limited, CR Services Credit Bureau PLC and XDS Credit Bureau Limited.

You can also check your credit score on nairaCompare!

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Although scoring models vary, they usually consider your payment history, credit utilization rate, the amount you owe, and hard inquiries among other factors.

The specific steps that can improve your credit score will vary based on your unique credit situation.

Some things to consider that can help almost anyone boost their credit score include.

  • Reviewing your credit reports
  • Paying off loans on time
  • Keeping your credit utilization rate low
  • Limit applying for new loans

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