What Causes a Loan to Be Declined?

Two of the biggest problems for consumers who are denied credit is that they may accept their fate or keep applying for credit, an action that can further reduce their chances of receiving approval. Lenders look for consumers who can afford to repay a loan and who have a history of repaying their debt on time. Consumers have a better chance of qualifying for a loan if they have good credit and only borrow an amount that is appropriate for their income level.

Credit History

A poor credit history is a common reason for credit rejection. Lenders, especially credit card companies, automate the underwriting process by pulling the applicant's credit history from one or all three of the major credit reporting bureaus and using software to calculate credit risk. Negative items on credit reports, such as collection accounts and a high amount of outstanding debt, can cause a low credit rating that leads to rejection.

Income

A consumer can have a great credit rating, but face rejection because he does not have enough income to support the debt. Generally, a person should spend no more than 36 to 50 percent of his income on monthly expenses and debt. For instance, if an applicant earns $2,000 a month, he cannot afford a $1 million loan and will not approved by the lender.

Miscellaneous Factors

Lenders might look at dozens of factors on a loan application. The credit scoring model used by most lenders, for instance, has 36 factors that usually lower a person's credit rating. Creditors often make informal judgments about a person's demographic data too. For example, a spotty job history might mean the applicant could skip out on the loan or frequently moving can cause a bill to get lost.

Tips

Consumers should review their credit reports for free via the Annual Credit Report website and look at their reports from the perspective of a lender. Late payments, collection and charge-off accounts and too much debt are the most important items in a credit history. The applicant also needs to lead a more stable life and earn more. For instance, a person applying for a mortgage might ask for a raise before submitting his application. Lenders may expect applicants to work for the same employer for two years before applying for a loan. Because loan applications lower a consumer's credit rating, he should limit his requests for credit.