The Basics: Why You Can’t Get Approved For a Loan or Line of Credit
Being rejected for a loan can leave you feeling defeated, embarrassed, and sometimes even confused. This is especially true if you have a good credit score, a high income, or other positive financial attributes. Why wouldn’t a lender extend you credit? For most of our lives, we’ve been told to protect our credit like it’s a direct key to wealth. But the truth is, your credit score is a factor, but certainly not the only one.
Let’s look at the basic reasons you will find yourself rejected for a loan from a traditional lender or institution. Remember, a lending decision is based on multiple factors, not a single statistic like a credit score. You’re not likely going to be approved for a loan if you have any, or a combination of the following:
- Low credit score: Whenyou have a low credit score, it indicates to lenders that you are a higher risk borrower, which can make it more difficult to get approved for a loan.
- Lack of credit history: If you have little or no credit history, lenders may not have enough information to assess your creditworthiness, which can make it difficult to get approved for a loan.
- High debt-to-income ratio: If you have a lot of debt relative to your income, it can make it difficult for you to take on additional debt, which may cause lenders to reject your loan application.
- Recent late payments or defaults: If you have missed payments or defaulted on a loan in the past, this can negatively impact your credit score and make it more difficult to get approved for a loan in the future.
- Limited income or employment history: If you have a limited income or employment history, it can be difficult for lenders to determine if you will be able to repay a loan, which may cause them to reject your loan application.
These are some of the most common reasons, but there can be other factors as well that are specific to your situation. Because these are the most common reasons you’ll find yourself being turned down for a loan or other line of credit, let’s look at some solutions.
You can’t get a loan because your credit score is either too low, or you don’t have enough established credit.
Credit has become much easier to control over the last 20 years. Credit scores fluctuate on a daily basis in many cases, and with self-reporting, users have more tools at their disposal right now to improve their credit than ever before. Having a low credit score or a lack of credit history are similar problems, with similar solutions.
Establishing or reestablishing a credit score from the ground up.
If you’re young, and haven’t established a credit history, this means you’ve never had a loan or line of credit provided to you before. You’re in a better position having a low credit score, with a long-established credit history. When you have no credit history, you still face an uphill battle, but without the weight of old derogatory marks adding to the difficulty.
You may be asking yourself, how do I establish credit if no one will extend me credit due to my lack of credit history? It’s a bit of a catch 22, but there are certainly ways to accomplish this.
- Apply for a secured credit card: Secured credit cards require a security deposit that serves as collateral for the credit limit you are granted. These cards are typically easier to qualify for than traditional credit cards and can help you establish a positive credit history if you use them responsibly and pay your bills on time.
- Become an authorized user: You can ask a friend or family member who has good credit to add you as an authorized user on their credit card. This allows you to piggyback on their credit history and start building your own.
- Apply for a credit builder loan: Some banks and credit unions offer credit builder loans that are specifically designed to help people with no credit history establish credit. These loans work by depositing the loan amount into a savings account, and you make monthly payments to repay the loan.
- Pay your bills on time: While paying your bills on time doesn’t directly establish credit, it helps build a positive payment history that can be reflected in your credit report. This can help when you apply for credit in the future.
- Use alternative credit reporting: Some companies specialize in alternative credit reporting, which allows you to build credit by reporting non-traditional credit activities like rent and utility payments. These activities are not typically reported to the major credit bureaus, but can help you establish a credit history.
These are some methods for people that have no credit history. In many ways, this is a better situation to be in, as your credit is basically a clean slate. In today’s lending world, there’s a significant amount of first-time borrowers programs, which are specifically designed for people looking to build, or rebuild, a credit history from the ground up.
You’ve established a credit history, but your credit score is low.
In this situation, you’ve built your credit history over a significant amount of time, but your credit score is low due to derogatory marks, a high debt-to-income ratio, or a variety of other possible reasons. Unlike a “clean slate” credit history, rebuilding a troubled credit history can be a bit more challenging. But, in 2023 consumers have more tools available to them than ever before to make this process much easier, and faster.
Let’s look at some ways to rebuild credit if you have a previously troubled credit score.
- Review your credit reports: Start by obtaining a copy of your credit reports from the three major credit bureaus – Equifax, Experian, and TransUnion. Review your reports carefully and look for any errors or inaccuracies that may be dragging down your credit score.
- Make payments on time: Payment history is the most important factor in your credit score, so it’s crucial to make payments on time. Consider setting up automatic payments or payment reminders to ensure you never miss a payment.
- Pay down debt: High levels of debt can hurt your credit score. Focus on paying down your debt, starting with high-interest debt first.
- Consider a secured credit card: If you have trouble getting approved for a traditional credit card, a secured credit card can be a good option. A secured credit card requires a security deposit, which is used as collateral for the credit limit. Use the card responsibly and pay your bills on time to start rebuilding your credit.
- Apply for credit with caution: While it’s important to start using credit again to rebuild your credit history, it’s critical to apply for credit with caution. Too many credit applications can hurt your credit score.
You can’t get approved for a loan because you have too much debt.
When a bank evaluates a loan application, they consider a variety of factors, including your income, credit score, and debt-to-income ratio (DTI). Your DTI is the amount of debt you have compared to your income. If you have a high level of debt compared to your income, it can be an indication that you may struggle to make payments on a new loan.
While you may feel that you can afford the loan payments based on your income, the bank is responsible for assessing your overall financial situation and determining whether you are a good candidate for a loan.
Luckily, there are plenty of ways to address this issue.
- Pay down your existing debt: One of the best things you can do to improve your chances of getting approved for a loan is to pay down your existing debt. This will reduce your debt-to-income ratio and show lenders that you are taking steps to improve your financial situation. Many people choose to utilize a debt relief service to tackle their debt. This is because, by comparison, working with a reputable debt relief company can save you anywhere from 20% to 80% off your debt, making paying it off significantly easier, and faster.
- Increase your income: If you are able to increase your income through a raise, a side job, or another means, it can help you qualify for a loan. A higher income can offset the impact of your existing debt and improve your debt-to-income ratio.
- Consider a cosigner: If you have a friend or family member with good credit and income, they may be willing to cosign on a loan with you. This can help you qualify for a loan you may not otherwise be able to get on your own.
Late payments and derogatory remarks make it so you can’t find a loan.
While this may seem like the worst possible scenario, these days it’s not only possible, but relatively quick to recover from these hiccups on your credit history. Here are some of the steps you can take to improve a credit score suffering from late payments or derogatory marks.
- Improve your credit score: Your credit score is one of the most important factors lenders consider when deciding whether to approve a loan. Take steps to improve your credit score by paying your bills on time, paying down debt, and disputing any errors on your credit report. The more on-time payments you make, the less your old, late payments matter. Lenders understand people experience hardships, so temporary lack of payments are often considered just this, temporary.
- Build a positive payment history: One way to counteract past late payments is to build a positive payment history moving forward, especially on your secured debt. Make all of your payments on time and in full, and consider setting up automatic payments or reminders to ensure you never miss a payment. Many of us miss payments simply because we forget, but the more on-time payments you can make, the faster your score will begin to reverse course.
- Offer collateral: If you are applying for a secured loan, such as a car loan or a home equity loan, offering collateral can help improve your chances of getting approved. Lenders are more likely to approve loans when they have collateral that they can seize. It’s important to understand that collateralized debt can’t be entered into a debt relief program, so be sure the collateral you offer is worth the credit being offered in return.
- Find a co-signer: If you have a friend or family member with good credit and income, they may be willing to co-sign on a loan with you. Your chances of an approval go up as the lender will consider their creditworthiness when evaluating your application.
Where do you go when everyone says no?
The unfortunate truth is that you will not always be in a position to receive a loan or line of credit, for one of the reasons we’ve covered here, or another reason, and that’s okay. It’s more important than ever to be careful when looking for a loan or line of credit. Predatory lenders have nearly tripled since the start of the Covid-19 pandemic.
Many people turned to these companies in their darkest hours, because they would approve them when banks or other financial institutions wouldn’t. There’s a reason for this, of course, and it’s not benevolence.
Predatory lenders charge upwards of 300% interest, or more if you’re dealing with an especially unethical lender. To put this into context, a loan for $1,500 at 300% interest, and a term length of 24 months would result in you paying back a total of $9,042! So while you may have been able to secure your $1,500 loan, that loan will ultimately cost you $7,542 in interest. This is why it’s so important to avoid these types of lenders unless you have no other choice.
Maybe you don’t actually need a loan.
This is a difficult reality for some people to face, but it’s vital to look at your situation as objectively as possible and determine if you truly require a loan. If you’re seeking a loan to pay down other high-interest debt, like credit cards, there’s much better ways to accomplish that.
Debt effects every decision you make and strips you of the ability to borrow at an acceptable interest rate. In many cases, debt prevents you from borrowing at all. Remember, more debt is never the answer to too much debt.
To get yourself back on track, you need to first eliminate your high-interest debt, which in turn will begin repairing your credit score, setting you up to be in a great lending position with attractive interest rates.
Your partner in debt relief,
Consumer First Financial