Why Do Banks Decline Your Personal Loan Application
Being turned down in any way can cause an unpleasant feeling that sometimes leads to questioning your ability or even your self-worth. The so-called "rejection" gives off that not-so-good vibes, making you lose your focus.
Getting the rejection email may dampen your mood, and make your happy thoughts vanish into thin air. You then contemplate on reasons why your job application or your travel visa application or even your loan application was denied.
In this article, we list down the most common reasons why the bank or financial institution decided to reject your loan application.
Poor credit history
Banks and lending institutions use your credit history to evaluate how worthy are you to be granted a loan. Credit bureaus like TransUnion rate your profile with three-digit numbers called the credit score. It's either you have a low credit score or negative remarks on your credit report. A low credit score means high risk for creditors – that is assuming you will have difficulty repaying your borrowed money on time.
Just like what we've mentioned in our "Get Your Personal Loan Approved with These Tips" article, your credit history is your financial resumé. Banks examine your activities and relationships with lending institutions. Credit bureaus also report about paid or unpaid postpaid accounts under your name.
Here are a few factors contributing to a low credit score:
1. You fail to stick to the credit agreement
This happens when you fail to pay off according to the loan contract. Failure could mean deviating from the agreement you signed. For instance, you borrowed a loan with a tenure of 15 days, and yet you did not settle your balances within that tenor.
2. You chose the wrong credit card
You previously own a credit card that doesn't suit your needs. You just swiped it for purchases and set it aside because you do not get any benefit from it. The right credit card that will give perks could help you save more and spend reasonably.
3. You only pay the minimum
Credit card bills indicate your full balance and the minimum payment required. More often than not, you are tempted to pay the minimum and leave a considerable balance each month. It is time to realize that more interest charges incurred when more balances are left in the account. The more significant amounts you leave means higher earnings for the bank.
4. You have no credit history
Credit profiles compose all your borrowings in the past. First-time loan applicants usually have the difficulty to be granted a loan because lenders don't have any basis for evaluation. Start your credit profile by setting an account with telcos or banks through secured credit cards.
5. You are a victim of identity theft
Just recently, a fraudster revealed how his group steals credit card information and make these available in the black market. Being a victim of identity theft is not a comfortable journey. You need to replace your card, call the bank to have it blocked and submit a dispute. It may take some time before banks release their verdict on the transactions made with your card. Until the case is settled, your credit profile takes a low dip, which might cause the decline of your loan application.
What can you do about it?
Rebuild your credit score. Rebuilding a credit score takes time; however, the first step is for you to settle outstanding debts. Banks have prepared payment schemes and are always open for negotiation. Once paid, ask them to have it deleted from your profile. While trying to pay off, you can start with secured loans and credit cards to establish a better profile.
Lenders, banks and other financial institutions do take note of your income because they want to be sure that you can sustain the monthly repayments. If your salary isn't enough to accommodate your financial responsibilities, then your chances of getting approved with a loan may be a bit low.
Check if the lender has a minimum income requirement, so it's easier for you to decide whether to push through with the loan or not. Some people with lower income resort to other means of earning extra money.
What can you do about it?
Improve your income statement. Nowadays, lenders consider bank statements reflecting remittances from your relatives abroad or online clients. You can also download your transaction history from PayPal. This will give the banks an idea that you are receiving money from other legal means aside from your employment compensation.
Too much debt
This one's a no-brainer. Your pile of debt plays a significant role in your personal loan application. If you're in knee-deep loans, then the bank has every right to reject your application. Your debt-to-income ratio, which should be 12% or lower, is essential to the lenders.
What is the debt-to-income ratio?
The debt-to-income ratio reflects an individual's ability to manage debts and payments each month. It is generated by dividing your total liabilities to your gross monthly income - the amount of money you receive before other deductions like taxes.
Here is a sample computation:
Php30,000 – gross monthly income
Php10,000 – the amount of debt payable in each month
Php10,000 divided by Php30,000 = .033 x 100
33% = debt-to-income ratio
On the other hand, some people with high income still get declined in their loan application because their debt-to-income ratio is higher than what lenders prefer.
What can you do about it?
Reduce your debts and refrain from getting new ones. Before applying for a personal loan, make sure your debt-to-income rate has breathing space for late repayments. Settle those with high-interest charges and make sure you pay off small debts as soon as possible.
Inconsistent details in the application
Details in your form that are inconsistent or incorrect can get you rejected in an instant. Aside from this, the lack of necessary documents can also be a reason why the lender turned you down.
What can you do about it?
Be truthful when submitting your documents and when providing your personal information. Make sure that the details are correct and accurate. Whatever you write in the application forms will be verified through a call from the lending company's representative. There is no point making up numbers and figures when lenders always have a way to find out the truth.
Getting rejected especially in your personal loan application is heart-breaking, but it always leaves a lesson, so you know what to do next time.
Here's what you can do to improve the chances of getting your loan application approved:
1. Long-term strategies:
* Build your credit
You might have been denied a credit card or a personal loan today, but that doesn't mean you will be denied forever. Build your credit by opting for small loans which you can pay off on time. A secured credit card from your bank of account (BOA) can also help out. For instance, you can open a savings account with PNB, UnionBank, BPI or other banks that can hold the saved amount as a guarantee to your secured credit card. Your secured credit card will usually have a credit limit equal to your savings. Gradually build your credit profile by paying off your balances on time. It may take around six months before your credit profile improves.
* Contact your creditors
Banks and lending institutions can offer a payment plan for you. There are times when your debts amount to Php50,000, and the lender can have it closed if you can provide 50% of the balance right then and there. Be sure you've got substantial cash before arranging for a settlement. Lenders agree on a reduced amount for compensation because the total balance is usually made up of the principal and the accumulated unpaid interest charges.
* Find other legal means of earning
Filipinos are always known for their resourcefulness and talent. Multi-tasking is everyone's masterpiece, so you can find a way to increase your income. Aside from your monthly salary, you can opt for gigs like a tutorial, online writing, or becoming a catering staff during weekends.
* Reduce your expenses and prioritize your debt repayments
If you are used to travelling during long weekends, it is high time to defer your next trip. Let go of things that will let you do unnecessary spending. Dining out, shopping and other extravagant habits can be set aside for a while until you've paid off your debts and saved enough. This remedy could seem toxic, but you'll eventually earn your peace of mind when you see your credit score improve.
2. Short-term strategies
* Offer collateral
Improving your credit profile could take months, and you need that loan right now. In this case, you can apply for a secured personal loan and offer the lender with collateral. The downside of this approach is that you might be losing your property once you fail to pay the debt.
* Get a co-maker or a guarantor
A friend or colleague or a family member could share the burden of repayment with you. A guarantor or a co-maker assures the moneylender that someone else will take the responsibility of paying the loan once you defaulted. Just make sure you both understand the differences of a principal borrower, a guarantor and a co-maker.
* Provide a down payment
A down payment is another strategy you can do with other types of loans like car loans or mortgages. However, in the Philippines, loans for gadgets and appliances also require you to provide a certain amount as an initial cost to your loan. For instance, Home Credit pays for your devices but would let you pay off a certain percentage to be deducted from the total purchase value.
3. Immediate remedies
Here are a few things you can immediately do to recover from the rejection of your loan application:
* Call the lender to know the main reason of rejection
It may only take a few minutes for you to see the reason why. Most lenders send you the rejection letter without specifying the reasons. A call can clear things out and can help you do immediate action.
* Fix errors
Knowing the reason why you got denied of a loan can help you fix any error. Get a copy of your credit report and see whether everything indicated there are valid. Some debts you settled a few years ago may still appear. If this is the case, you can call your previous lender for modification. You can ask for a clearance or debt settlement certificate then present it to the credit bureaus for correction.
* Pay off the debts
Make a list of your debts and pay off the smallest you can. Plan out a strategy on how to settle other responsibilities.
What to look for in a personal loan?
Personal loans should help borrowers pay for emergency financial needs. Citi® Personal Loan allows you to apply and get feedback within 24 hours. You dont have to look for a co-borrower or guarantor. In fact, you'll immediately receive a call from a Citi officer to confirm approval of the loan. What's more, Citi makes it possible for you to get a personal loan amount for up to Php2 million.
Applying for a personal loan is a painstaking journey, especially for those who do not have a credit history and those with low credit scores. Getting rejected is not the end of the story. You can still do a lot of things to improve your chances in the future. Pay off your debts, improve your income and compare personal loan offers.