If you’re looking for a loan, it’s natural to wonder what why loans get rejected. The process can be a bit nerve-wracking, so we’ve laid out a simple rundown of the five main reasons why loans get rejected based on our experience as business finance experts.

When new borrowers apply for a loan, the lender will go through a process called ‘underwriting’. This is where they assess your credit and financial viability for a new loan. It’s during this process that weak applications can get rejected. In this article, we break down the main reasons for rejection that we see in our industry.

Collateral

Finance brokers need assurance that the money they lend you can be recouped or recovered. Think of it as a safety net for the lender. This lowers the lender’s risk, which can help you borrow more and secure better rates.

Collateral is a really easy way to create this safety net. Your belongings, or assets, will have value. If you fail to repay your loan, the lender may take assets of equivalent value to recover the money they lent you.

The easiest asset to use as collateral is often your home, as it has a high value. Using your home as collateral shows that you are confident you will repay the full amount. It shows the lender you have skin in the game.

This ultimately lowers the risk for the lender, and the lower the risk, the more money they can lend you.

At Pinnacle, we’ve seen how a lack of collateral can quickly turn a promising loan application into a rejection.

Debt-to-income ratio

Your debt-to-income ratio shows the percentage of your income spent on debt repayments.

It is calculated as a percentage, and the ideal range for lenders is less than 40%, though this can vary from lender to lender.

Debt-to-income ratio is calculated by dividing your monthly debt payments by your gross monthly income, then multiplying by 100. It’s a quick sum you can do to assess your likelihood of getting approved.

When over 50% of your monthly income goes towards paying off debts, it can raise alarm bells for some lenders that you might be in too much debt to take out a new loan.

Insufficient funds

During the underwriting, lenders will look at your financial activity. They are usually looking for warning signs that the borrower might struggle to pay back their loan.

Being in an unauthorised overdraft, or too close to your overdraft limit, can signal poor financial management and could lead to rejection.

The lender will also be able to see how often you pay off your overdraft. If it never gets paid off, this could lead to rejection.

They might also look at your direct debit payments and see if they often bounce back. It’s important not to panic if this has only happened once or twice. Lenders will look at the overall picture of your outgoings, direct debits and overdrafts to make sure you aren’t a high-risk borrower.

Bad credit

A credit check is part of the process of getting a loan. The following things can negatively affect your credit score and, in turn, your loan application:

  • You’ve had serious credit problems in the past, such as CCJs, IVAs or bankruptcy.
  • You’ve made several credit applications in a short space of time.
  • You’ve missed payments, paid late or fallen into arrears before.
  • You’re not registered to vote at your current address.
  • You already owe a large amount compared with your income.
  • You’ve moved house frequently, which can make your finances look less stable.

Missing information

When lenders go through the underwriting process, they will ask you for documentation. This is so they can assess all the above criteria.

At Pinnacle Business Finance the number one reason why loans get rejected that we’ve seen is that borrowers fail to send their documentation over within the time frame. Sometimes people feel uncomfortable or embarrassed to share an honest picture of their financial information with lenders.

This is completely understandable, but without the documentation, your lender cannot check your eligibility or help you find a solution. So, it’s vital that you allow them to access this information.

Thinking about getting a loan?

We’re here to help. Our friendly team of experts can help match you with the right lender for your business. We make the process less complicated and offer a range of different services beyond loans that can help grow your business. Head to our contact page to submit an enquiry and start the conversation.