Most people can agree that humans don’t handle rejection well. While rejection is often related to romance, loan rejection can be just as impactful. Though it’s not personal, loan rejection can wound your pride, crush your dreams and even cause fear for the future. After all, without financing, how will you purchase a car for work, buy your first home, pay for education or consolidate oppressive debt? The truth is that most people, at some point in life, will need the help of a lender. And it’s important that if that time comes for you, you know what steps to take to avoid rejection so you can get approved for a loan.
Factors That Affect Your Creditworthiness
To understand how to get approved for a loan, you need to understand what factors determine your creditworthiness. Though not every lender weighs each element the same, the top considerations are as follows:
- Credit Score: Your credit score will likely have the biggest influence on the lender’s decision. This three-digit number tells them how well (or how poorly) you manage your finances. As your score goes up, so too do your odds of approval.
- Debt-to-Income Ratio: Lenders want to see that you make enough to cover day-to-day expenses and future loan payments. An ideal debt-to-income ratio is 36% or less.
- Employment History: A sporadic or irregular employment history may indicate that you are at risk of defaulting on your loan. Depending on the size of the loan, a lender may request one to two years of employment verification.
- Down Payments: A down payment can help improve your chances of approval in two ways. First, it can show lenders that you’re serious about a big purchase. Second, it can increase a lender’s confidence, as it reduces the amount you will have to borrow and, therefore, repay.
If you get rejected for a loan, chances are the reason has to do with one of the above. The good news is that the lender should include the reason for denial in the rejection letter. This will allow you to determine which area needs improvement before your next application.
Improve Your Odds of Approval By Showing Up Prepared
As with anything in life, preparation can go a long way toward ensuring your success with the loan application process. While there is no way to guarantee that you will get the financing you need, you can better your odds by getting the following in order before you apply:
- Your Credit Score: Your credit score usually carries the most weight on the likelihood of your application being approved. You can start off strong by repairing your credit before you apply. We recommend using a service such as Credit Verify to pull your report and get a 360-degree view of your credit health. Once you have your report, ensure you know how to read it. Don’t just look at your FICO 8 scores, many creditors still use the more stringent FICO 2 and 4 scores. To get a decent loan with favourable terms, you want your score to be 650 or higher. If all three are not there yet, take time to dispute any errors, pay down your debt(s) and boost your scores before you apply.
- Pay Down Your Debt: Lenders are usually hesitant to lend money to those who appear to put everything on credit. Putting too much on credit, or having too many loans, suggests you can’t afford your lifestyle. If you have several outstanding loans, consider paying some off or, consolidating them before you apply.
- Come With Employment Documentation: If you’ve been with the same employer for years, have your T4s and tax returns ready. If you have had multiple jobs in recent years, attempt to make yourself look as good as possible; demonstrate that you are rarely without work and that you have success finding new employment in the same field. If you do have gaps in employment, be prepared to present a valid reason as to why.
- Be Prepared to Offer a Down Payment: Even if a down payment is not required, it may ease the lender’s mind to know that you’re in a position to provide one.
While the above tips can help you avoid being rejected for a loan, know that loan rejection is normal but not final. If a lender does reject you, shop around. There are hundreds of lenders out there who are flexible with their requirements and willing to work with those who have a low credit score or a high debt-to-income ratio.
During trying times such as those COVID-19 has created for us, finding affordable financing is more important than ever. It’s also important that you can shop around without doing more damage to your credit score. To easily search for loans with the most competitive rates and the best terms, give our loan search engine a try today.