Do you know the 3 common reasons why your loan application is rejected?
The loan application process is a highly competitive environment these days. This fact is confirmed by the statistical data showing 48% of applicants were denied over the past year.
In other words, getting approved for the amount of financing you require is not as easy as it was before.
The challenging reality… It’s important to highlight that the majority of people are not even aware that their loan application process is not successful. They are also unaware of the common factors affecting the outcomes.
Whatever the goal of your loan application (be it to secure a 500 dollar loan or any other loan size) is, learning the main factors being checked by a financial institution can significantly increase your chances of approval.
In this post, I’m sharing the top factors to focus on to improve the chances that your application is approved with minimal chances of it being rejected.
Let’s get into it!
What you are about to discover
- What the loan application process actually means
- Credit Score – Your greatest ally
- Income verification & the debt-to-income ratio
- Why your application history is so important
- The documentation that will help you be approved quicker
What the loan application process actually means
First of all, don’t think that this process is more complicated than it really is.
In reality, when the lenders review your application, they just want to know the answer to one question:
Will I get my money back?
Simple as that!
All the information they ask for during the application process is a way to answer that question for them. Once you get it, you will understand their requirements to provide the needed information, too. In other words, lenders will look at you as a person of a certain risk profile.
Credit Score – Your greatest ally
In my opinion, this is by far the first and most crucial factor for loan approval.
It is the information they use to evaluate how you have been managing the credit in the past. The better this information, the higher the chances to have your loan approved, as well as getting the best interest rates.
Here is one thing to keep in mind…
Credit scores are usually divided into ranges. If your score is above 700 points, it is generally considered a good score. At the same time, the lower it is (below 600, for example), the more challenging it will be for you to get an approved loan.
Don’t get me wrong… It doesn’t mean you have no chances at all to get approved. Many credit providers work with people with bad credit, and they know how to help you in this case.
But it is of critical importance for you to know where you stand before you start your loan application process. There are different ways of knowing your credit score through services like Credit Karma or directly through your bank.
If you see that your credit score is low, you need to work on it:
- Pay your bills on time
- Avoid carrying a high balance on your credit cards
- Don’t apply for new credit
- Check your credit reports for any errors
By making even small improvements, you will increase your chances of having your loan application approved.
Income verification and the debt-to-income ratio
Lenders must be certain that you are able to repay the borrowed funds.
This is when the concept of income verification comes in. To do so, you have to show the evidence that you have a stable source of income. This can be done by providing such documents as your latest pay stubs, tax returns, and bank statements.
However, there is one more important thing to consider…
Your income is not the only important factor here. In fact, lenders also look at your debt-to-income ratio (DTI). This ratio means what portion of your monthly income you spend on debt repayment.
Let me explain this with an example…
Let’s say you earn $4000 monthly, and your overall debt payment is $1200. This means that your DTI ratio is 30%.
The majority of credit providers look for a DTI that is below 43%, but some can go higher if there are other favorable conditions. If your DTI is too high, you have 2 ways to improve it:
- Increase your income
- Reduce your overall debt
The lower your DTI ratio is, the more attractive you become for the lenders.
Why your application history is so important
This is one of those things that surprise many borrowers out there.
Remember how every time you apply for a loan, it creates a “hard inquiry” on your credit report. Having many hard inquiries over a short time will lower your credit score and will scare lenders off.
The question is – why? Because it means that you are just applying for all the credit you can. In other words, you do not look like a stable person to lenders.
Here is a solution to this problem…
Try to be strategic about where you apply for a loan. Check different financial institutions and their requirements and only send applications to those where you have a realistic chance to get approval.
There is an easy way to do it… Many of them provide pre-qualification options that are based on “soft inquiries.” This way, you do not impact your credit score and can see if you can be approved.
Did you know that the percentage of loan rejections in all types has been growing over the last year? Auto loan rejections reached 11.4% in 2024, the highest rate in the past 13 years.
This means that you should be even more careful than before about your applications.
The documentation that will help you be approved quicker
Do you know the quickest way to slow down your loan approval?
Missing the documentation!
Lenders always ask you to provide particular documents when you apply for a loan. If you have all of them ready before you submit your application, it will significantly speed up the process. The majority of them will usually require:
- Your government-issued ID (a driver’s license or a passport)
- Income proof (latest pay stubs, tax returns, or bank statements)
- Address proof (a recent utility bill or lease agreement)
- Your employment verification
- A list of your current debts and their monthly payments
Having all of these things at hand means that you are serious and that you are well-prepared. It also prevents time lost by “reminders” and “returns,” and it all makes this process run smoothly.
By the way, here is a pro-tip for you…
Keep digital copies of all of your documents at hand in a secure folder on your computer and/or in the cloud. This way, you will have them ready to upload any time you need.
3 little-known factors to also consider
In addition to the major factors, other things also influence lenders’ decisions:
Employment stability – It makes a difference for how long you have been at your current job. Credit providers will prefer to work with people who have a stable work history.
Loan purpose – Some of them are ready to provide loans for specific purposes (debt consolidation, for example) rather than for general personal usage.
Collateral – If you can pledge any of your assets as a collateral for the loan, it will be easier for you to get it approved. This is because it is a secured loan.
Existing relationship – Lenders always prefer working with people who have a bank account with them. If you already have one, it will increase the chances of loan approval.
The final thoughts on the loan application process
In the end, the loan application process is not that scary, once you know what lenders are looking for. By focusing on the main factors, which include your credit score, providing evidence of your income and your debt-to-income ratio and providing all the necessary documents, you will have much higher chances of approval.
Preparation is the key to success in this process. Take your time to research and look at your credit score, find the necessary documents, and make sure that you look for financial institutions that suit your financial profile.