There are numerous reasons why lenders knock back an application for finance. However, while traditional lenders are good at saying no to customers that don’t fit the mould, sometimes they’re not very good at explaining why they said no.
Set out below are a number of scenarios explaining the various circumstances that might lead a traditional lender to reject an application for a loan.
You have a bad credit history
If a borrower has bad credit, many lenders will consider them too risky and this can make it difficult for their loan to be approved. When anyone applies for finance, along with reviewing conduct on existing loans, the lender will access the applicant’s credit file to help assess their likelihood of meeting their repayment commitments. A ‘credit check’ confirms if you have any defaults recorded on your credit file that show you haven’t met financial commitments in the past.
A ‘default’ occurs when you are 60 days overdue in making a consumer credit payment. It is important to note, however, that a default can only be reported to a credit reporting body if the amount is $150.00 or over and two separate written notices have been provided. If you want to know what is in your credit file, read more about it in our blog here.
Some lenders also consider many self-employed workers as risky because of the irregular way they earn an income. This means that self-employed workers need to have at least two years’ worth of tax returns filed with the ATO before a traditional lender will consider their application.
For many, this means that when it comes to buying new equipment for the business, or a new car to get around, finance isn’t a ready option. If you’re self-employed and struggling to get finance, read more about your options here.
You were approved for a home loan, but not for the amount you needed
Sometimes lenders are prepared to approve an application for a home loan, but they just won’t do it for the amount the applicant requested. One of the reasons this can happen is because of the serviceability testing lenders apply to every loan application.
Any time someone applies for a home loan, a serviceability test is done to show the lender that the loan can be serviced at not just the approved interest rate, but a higher interest rate, should rates increase. When an applicant doesn’t pass the serviceability test, instead of turning them away, the lender may offer a lower, more affordable amount.
You have too many loans
Having a car loan, personal loan, credit card and home loan can be hard to juggle. Not only does it mean you have lots of different debt, but it also means there are lots of repayments coming out each month that affect your borrowing power.
What can you do to improve your next loan application?
There are lots of reasons why you can be knocked back for the finance you need, thankfully with the right help, you can navigate through the finance maze much more easily. There are a number of smaller, more flexible lenders that are able to find more ways to get to yes.
If you want to learn more about these lenders, talk to a Liberty adviser.