5 Common Reasons Loans Get Declined

If you get knocked back for a loan, it's okay to feel disappointed. In the world of Comprehensive Credit Reporting, your credit scores take a hit, and you're left with that hard enquiry for up to five years. Not the outcome you were hoping for, but you can rest easy knowing there was probably a reason your application was declined. 

If you're left scratching your head over the decision, here are a few common reasons loan applications get declined.

Ever wondered why lenders ask for a copy of your bank statements when you apply for credit? It’s because they need to assess your cash flow to determine whether you can actually service the loan and make your repayments. If your discretionary spending (the fun stuff) is draining your bank account every pay, it could indicate that your current lifestyle can't support any additional repayments. 

Likewise, if your living expenses are astronomical, it would be irresponsible for a lender to grant you a loan for a holiday, wedding or home renovation that you simply can't afford to pay back, particularly if it might adversely impact your life. 

A few tips for improving your loan serviceability:

– Reduce your discretionary spending

– Consider reducing your credit card limit

– Reduce unnecessary living expenses (within reason)

– Demonstrate that you can save money by putting some into a savings account (and leaving it there!)

Placing a bet on your favourite footy team might seem pretty harmless, but for people who struggle to keep it under control, online gambling can be considered a red flag for lenders. It's considered a 'high-risk behaviour' and may disqualify you from accessing credit, especially if the amount you're spending on gambling hinders your cash flow and serviceability.

Your credit file holds important information about your financial history, but the number attributed to it is a powerful factor in determining your creditworthiness. 

Generally, applicants with higher credit scores are more likely to be able to access credit and potentially unlock a lower interest rate. A lower credit score can limit your borrowing capacity, increase your interest rate and sometimes even disqualify you from accessing a loan at all.

Your credit score may be sitting rather low for several reasons – you made multiple hard enquiries in a short space of time, you have several debit dishonours, or you've missed credit card repayments. In the case of a 'thin file,' you simply might not have a long enough financial history to determine your creditworthiness.

Tips for improving your credit scores:

• Always pay your bills on time (auto-transfers are a huge help)

• Keep the number of hard enquiries, including loan and credit card applications, to a minimum

• Review your credit reports regularly and keep an eye out for errors. You can check your scores for free with Wisr App.

Unfortunately, lenders can't just "take your word for it" when you tell them about your employment status. They need to do their due diligence to maintain their responsible lending obligations, so they might conduct an employment check to verify where you're working and how long you've been there. 

If you've exaggerated your income, title or time with the company, that might give a lender grounds to decline your loan application. If it turns out that you're no longer with the company you named on your application, it's likely to be a 'hard no' from the lender.

As always, honesty is the best policy. Ensure you are 100% truthful in your application, as the truth often comes out in the end.

If you're constantly falling behind on your loan repayments, your debt may be sent to "collections" in order to bring your repayments back up to date This might be an internal process conducted by your lender or, in some cases, your debt may be sold to a third party to chase up.

Your missed repayments will be logged on your credit file, and any relationship you have with debt collection agencies might be recorded for future lenders to see. Any payments you make to the collections agency might also be visible on your bank statements.

So, if you've previously had a loan that has fallen into arrears, this may give a lender grounds to decline your loan application.