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Most people only seek a loan when they are in dire need of funds. These funds can be used for emergencies, a new car, and even home repairs. Whatever the reason a person needs a loan, it can be disappointing when they are turned down. Thanks to the Equal Credit Opportunity Act, lenders are required to disclose their reasons for denying a loan application. Below are three of the most common reasons.

Reason 1: Credit Reports

The first thing a lender will do when someone applies for a loan is check your credit report. Credit reports offer the lender much more information than just a number. If a person has a large number of outstanding loans, this may make the lender a little more cautious about increasing the person’s debt.

This credit report will also show the number of collection accounts, past due accounts, and the payment history of the person applying for the loan. These are all components of a credit report that can paint a picture for the lender, making them more likely to lend you money or deny a loan application.

Checking for discrepancies in a credit report can solve many problems for a potential borrower. If they discover that there are items on your credit report that are not yours, they will need to call and rectify this.

Reason 2: Insufficient Payment Means

Lenders need to know that the money they are lending is going to be paid back. When a borrower does not have enough income or means to repay the loan, a lender may be less inclined to give that borrower a loan.

In the vast amount of paperwork that is needed to apply for a loan, the loan company will ask the potential borrower to list their income and be ready to provide proof that income exists. Having this proof can help the lender justify borrowing the money if there is ever any question as to why they approved the loan.

Reason 3: Too Much Debt

Lenders take a hard look at a potential borrower’s debt-to-income ratio before lending more money. If a lender sees that a person is already using 50% or more of their income to pay down debt, they may be considered a subprime borrower.

Loans aren’t the only thing lenders will consider in terms of debt. The cost of living, credit cards, student loans, and collection accounts influence the amount of debt a person has.

Hard money loans as an alternative

If a potential borrower wants to retry the loan application process, the first place to start is to correct the reasons for the denial. After verifying the validity of the information in your credit report, lowering your debt-to-income ratio, and adding collateral to a loan or proof that your income is enough to support the debt, they might try again. The most important thing for borrowers to remember is that double-checking for accurate information is key. However, if the banks still reject your application, another option for loans is through a private hard money lender. Hard money lenders provide loans based on real estate equity, so they are a good alternative when the banks don’t approve.

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