If you’re hoping to get a loan, you might be worried about having your application rejected. Or you might have already been turned down by a bank and you’re not quite sure why. When you’re applying for a loan, it’s a good idea to understand why banks turn down loans so you can do you’re best to avoid potential issues and give yourself the best chance to secure a loan.
Poor or Insufficient Credit History
Lenders like to see that you have a history of borrowing reasonable amounts of money and paying it back on time. To them, this shows that you are responsible with money, that you can handle using credit, and that you can pay bills on time.
All this information is reflected in your credit report and credit score. Every time you take out a loan, the details of this loan are listed in your credit report. That includes how much you have borrowed, how often you make payments on time, whether you have missed any payments, and much more. Having a strong credit history is one of the most important factors when you are applying for a loan.
While having a poor credit history can be an issue, having an insufficient credit history can be a problem as well. If you simply haven’t borrowed much, the lender may not have enough information to determine the risk of giving you a loan.
Inconsistent or Low Cash Flow
For businesses that wish to take out loans, it’s important to show that your company has regular cash flow and enough cash coming in to cover your expenses and pay back the loan. If your cash flow is inconsistent, the lender could consider you a risk and be unwilling to give you a loan.
The same situation is true for many personal loans. If you don’t have a consistent income, or if your income isn’t high enough to safely cover paying back the loan and meeting the rest of your financial obligations, you may be turned down for the loan.
A debt-to-income ratio is a way to measure how much income a person or organization generates compared to how much is spent on debt repayment. This factor is especially important with car loans.
An easy way to calculate this amount is to figure out what percentage of your monthly income is spent on debt repayment. If you spend 20% of your income on debt repayment, for instance, your debt-to-income ratio is 20%.
Lenders typically want to see low debt-to-income ratios since this tells them that you are not overextended. If you’re spending too much on debt repayment relative to your income, the lender could assume you are likely to end up in financial trouble.
Lack of Credit
One of the major reasons that banks turn down assistance is because you don’t have any assets to secure the loan. This is especially true when it comes to business loans. Having some sort of collateral that can be used to reimburse the lender if you don’t pay the loan can give the lender more confidence.
You want to have your financial statements in order. The lender may ask you for proof of income, tax returns, and other financial details. If you don’t have them, you may not get the loan.
In addition, you’ll need to make sure to fill in every form correctly with accurate information. If there’s a field where you don’t know the number or you’re unsure of a date or fact, don’t just guess. Make sure you get the details right or you could cost yourself.
If you’re looking for a loan such as a mortgage and you’re not sure what you need to do to get approved and get the best rate, Axiom Mortgage Solutions is here to help. We can help you know what to do when banks turn down loans and give you the advice you need to get you approved. Please call us at (519) 735‑1440 or contact us online to talk to our team.