Note: From time to time I will have very smart folks provide a guest post on a particular finance topic. Today, we have one by Jamie Dalzell, who is a freelance writer (and a darn good one I might add). If you are interested with working with Jamie or contacting him you can go find him at the website Reality Copywriting.
6 Top Tips For Avoiding A Loan Application Rejection
If I asked you what your credit score is, would you know the figure off the top of your head? How about your finances as a whole? Are they really that healthy? The reason I ask is that personal loans remain a popular option for financing almost everything, from big purchases through to emergency expenses, but not every loan application is a done deal.
The state of your finances, your credit score, and even the application documents themselves can determine whether your application for a loan is a success or not. So whether you’re in the process of filling out an application, considering it, or recovering from a surprise rejection, there are a number of proactive steps you can take to avoid the pains of disappointment and ensure your next application is a success.
To start, let’s take a look at your finances…
1. Double check the income & employment requirements
They say you should never judge a book by its cover, which is why financial institutions do some deep digging to work out whether or not you’re eligible for a loan. Things like your credit score as well as the type of loan you’re applying for all play their part, but the most important one is also the simplest: your income.
Credit Unions? Banks? Peer 2 Peer Lenders? No matter who you’re applying to, they’re all going to be paying close attention to your current employment status, your income, and your expenses.
Let’s face it, a lender isn’t about to throw money at you if they *know* you won’t be able to pay it back. Neither would you! So if your finances aren’t in great shape, this won’t look good on your loan application.
Your best bet here is to aim for that long-awaited pay rise, turn your hobby into a money maker, or consider having a friend or family member co-sign your application as a guarantor. Which segues nicely into this next point…
2. Consider asking friends or family to co-sign as a loan guarantor
As we’ve already covered, your employment status and credit history can affect your loan application. While there are many ways to improve things like your credit score (more on this soon!), this can take some time. Time that you may not be able to waste, especially if you need the money fast!
If this is the case, then a guarantor may be just the thing for you.
A guarantor essentially takes on the burden of being jointly responsible for the loan should something go awry, and in turn provides the lender with added peace of mind that they’ll get their money back. While the guarantor won’t be making regularly monthly repayments – that’s still your job! – they will be stuck paying it off should you default on the loan.
As you can see, a guarantor is one way to further improve your chances of loan approval – and a lower rate loan, at that – but there are also a number of risks involved for the loan guarantor that both sides should consider before signing on the dotted line.
3. Make sure you know what you’re getting yourself into
They say knowledge is power, and that’s never been more true than when it relates to your finances! There’s no better way to empower yourself during the application process than getting yourself up to speed on the ins-and-outs of personal loans.
Whether it’s learning what kind of loan you should be applying for, or deciding on the right lender, there’s numerous things you need to consider before you submit your application. Things that could influence your chances of getting the stamp of approval.
Curious? Consider a few of the following:
- The longer the term, the more interest you’ll pay.
- Banks, Credit Unions, and Peer-2-Peer lenders all offer different rates, fees, and approval requirements, so shop around.
- Some lenders offer loans for the self-employed, or those with bad credit. If you fall into either of these categories, improve your chances by applying for a loan at a lender that offers these specialised options.
4. Improve your credit score *before* you submit your application
A poor credit score can severely affect the both the rate of interest and the total amount you’re offered when you apply for a loan. That is, if you’re approved at all!
You don’t even need to have defaulted on a loan or missed payments to have a bad credit score, either. Even something as simple as applying for too many loans in too short a timeframe can hurt your credit score. It may sound crazy, but it’s true!
This is why you need to check your credit score well before you apply. With this information in hand, you’ll be able to improve your credit score and, in turn, your chances of loan approval. A credit score anywhere above 750 is said to be a good starting point if you want the best shot at landing a low rate loan.
Here are a few quick and easy ways to do just this:
- Avoid making multiple loan or credit applications.
- Dispute any errors or mistakes that you may have noticed in your Credit Report.
- Keep Credit Card balances and other revolving debt to a minimum.
5. Secured or unsecured loans? Make the right choice
When is a loan not a loan? When it’s a secured or unsecured loan! That’s right, loans come in a variety of shapes and sizes. You have student loans, payday loans, fast cash loans, peer-to-peer loans, as well as secured or unsecured loans.
Secured and unsecured loans both offer a bunch of flexibility for people like you who are applying for a loan, and need an option that caters to their individual financial situation. Which of these is best for you depends on the specifics of your financial circumstances, including income, expenditure, and credit history.
An unsecured loan is easier to get, as you pass up the need to secure the loan with an asset, but in exchange often pay a higher interest rate on a lower amount. A secured loan, on the other hand, uses an asset like a car as ‘security’, which gives the lender increased peace of mind and gives you access to a lower interest rate, and a higher maximum amount.
What often trips many applicants up during this process is that the asset they use doesn’t quite make the grade. You’ll often find that lenders have certain restrictions and guidelines in place as to the kinds of assets you can use as collateral for your secured loan application. More often than not, a rejection in this case is caused by an asset that’s ineligible or of a low value.
6. An eye for detail
This one’s a small one, which is why it’s often so easily overlooked!
When it comes time to fill in your application form, keep an eye out for the small details. Even the best credit score or financial history can’t make up for incorrect information, which is why it’s always better to be safe than sorry!
Don’t undo all of the hard work you’ve done in being an upstanding financial citizen with some hasty paperwork. Instead, instead take the time to double or even triple check your application, and give yourself the best shot at landing the loan you need.
So before you submit your paperwork, double check to ensure:
- Is your phone number correct?
- Is your name printed clearly and without spelling errors?
- Is your handwriting clean and free from alternative interpretations?
- Is your address current and up to date?