Many might wonder why lenders would reject applications from those seeking personal loans with bad credit. The fact that loans are available for those with bad credit histories is good news, but unfortunately that doesn't mean that every applicant will get the green light.
Bad credit scores are generally used to tell whether an applicant is a suitable for a loan or not, with the lower the score the less likely approval will be. But a credit score may become poor for a number of reasons, like missed repayments or loan defaults. It is partly why lenders are now more willing to work with applicants.
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Understanding why a lender would refuse to grant approval with low credit scores can prove invaluable when it comes to compiling a strong enough application to ensure success. Below, we highlight 3 reasons why a lender may reject an application for a personal loan.
Having No Credit history
This relates to first-time applicants. From the point of view of the lender, having no track record in repaying loans is the same as providing no proof that the repayments can be relied upon. When seeking personal loans with bad credit, this is an impediment.
Establishing a credit record requires a few simple steps, like taking on a small no credit check loan and repaying it quickly. These can be for just $100 or $500, so are easy to clear, but it means a habit of repayment is clear to see. As a result, banks and other lenders have less reason to deny loan approval, with bad credit scores balanced by at least a recent history of reliability.
Another step is to secure a credit card and regularly pay the required balance, while proof of regularly saving in your bank account also tells lenders that there is excess income available to meet the personal loan repayments
No Collateral
When it comes to securing loans, providing collateral is the best way to secure approval. This extra security strengthens the chances of getting a personal loan with bad credit, but also means better terms like lower interest rates.
Collateral makes the key difference because it provides the lender with a source of compensation should the loan be defaulted upon. However, providing collateral means the applicant needs to have property of value, like a vehicle, jewelry or even home equity. If something can be found, then approval with bad credit scores is almost assured.
What is more, the chances of getting a personal loan with collateral are extremely strong, regardless of how poor the score is. Even the worst credit history can be overlooked if an item matching the principal of the loan is handed over as a kind of insurance.
Having No Source of Income
While there are loans available to the recently unemployed, the general rule is that an applicant must have a reliable source of income. What this means is that applicants seeking a personal loan with bad credit have to show they are in full-time employment and earn enough each month to meet the repayments comfortably.
For any borrower, the challenge in securing approval with bad credit scores is to prove affordability, which is not necessarily down to the income being earned. For example, if existing debts are high, then the lender will need to know there is enough excess income to cover the extra repayments.
This is where the debt-to-income ratio comes into play, which stipulates a maximum 40% of income should be committed to debt repayments. It means that the personal loan may need to be small to be sure the repayments stay within the 40% limit.
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