Seeking Personal Loans With Bad Credit: Why Applications Are Rejected

Jun 7
08:29

2013

Joycelyn Crawford

Joycelyn Crawford

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Securing a personal loan with bad credit can be a challenge, and sometimes the application is rejected. The reasons why can vary, but knowing the main ones can help applicants put together winning applications.

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There is no denying that the task of securing loans from traditional lenders has become harder than ever. In the current economic climate,Seeking Personal Loans With Bad Credit: Why Applications Are Rejected Articles and with the financial crises of the last few years still being overcome, lenders are cautious about approving loan applications, especially personal loans, with bad credit. But it is possible to get the green light.A key factor in successfully applying for a loan is to understand why the application might be rejected in advance of making your submission. Often, the reasons for loan rejection are simple enough to have been avoided in the first place, and a little effort put into preparing the application could have proven worthwhile.But what are the principal factors that lead lenders to reject an application? And what should a bad credit borrower do to avoid that fate when putting together the application for a personal loan?The Truth About Bad CreditIt is important to establish just how significant a low credit scores is. Most people believe that, when seeking a personal loan with bad credit, the chances are approval are drastically reduced because the score is low. But this is not actually true.Certainly, having a low credit score does not help the application process, but there are far more significant factors at play when a lender assesses an application. The reasons for loan rejection are rooted in affordability, rather than any evaluation of your credit history. Therefore, the scores themselves are minor concerns.Where the scores do have an impact is in the interest rate that is charged on the personal loan. Lenders will take the opportunity to charge higher rates when the score is low.But what are the reasons that a lender will reject a loan application? Here are the 3 chief reasons.1. Having No Credit ScoreThe problem with having no credit score at all is that lenders have no way of knowing whether the applicant can be trusted to make repayments or if they are going to default. At least anyone seeking a personal loan with bad credit scores has already indicated what the likelihood of either is.Of course, it is possible to get a loan application approved, but a cosigner or collateral is usually needed to get the green light. Having no credit is one of the main reasons for loan rejection because the application on its own is not usually strong enough.2. Offering No CollateralOf course, having collateral to offer along with a personal loan application can be tricky too. Remember, the item offered must be the same value as the sum being borrowed, so a $5,000 loan requires collateral worth $5,000, and not everyone has something worth that amount.Many types of items are acceptable as collateral, from family jewelry to cars to home equity. But with the exception of equity, all of these may depreciate during the loan term. A car, for example, may be only half the value after a 3-year loan so may only be accepted at its lowest value. So, finding suitable collateral when seeking a personal loan with bad credit is not easy.3. Too Much Existing DebtFinally, the amount of debt that an applicant already has is a key reason for loan rejection. The lenders measure this through the debt-to-income ratio, which states no more than 40% of available income can be used to repay loans. If that means the personal loan is not affordable then rejection is certain; but if the monthly repayment fits within the limit, then approval is probable.