There are a number of potential reasons why your application for a payday loan might be declined, denied or rejected. It can be extremely frustrating when you need to borrow money but aren’t able to for one or more reasons, such as; not meeting the basic requirements in terms of income, credit score, because you have other outstanding loans or simply because the lender does not have the capacity to lend any more that month.
Bearing this in mind, this guide will attempt to shed some light onto your situation, and explain the potential reasons why your payday loan application was denied. We will also expose you to some of the options you have available to you in this instance.
Reasons why your payday loan was declined
Issues with credit – most common
When applying for a payday loan, the lender will always carry out a credit check to get an idea of your credit history.
Your credit history and credit scores are primary factors that lenders consider when you submit a loan application. If lenders see any significant negative items on your credit report or other red flags, they may determine that as a borrower, you’re too risky to approve at this time.
Some examples of factors that can influence your credit score, include:
- Delinquent payments
- High credit card balances
You can also be denied if your credit score is lower than the lender’s minimum requirement. To prevent this from happening again, make sure you know your credit score and shop around for loans that are targeted to your credit range.
If you are rejected on account of poor credit, make sure to ask for a copy of your credit report!
Legally, you’re entitled to a free copy of your credit report if your loan application is rejected. The lender should provide instructions in your declination letter for requesting a free report from the credit reporting company the lender used to make its decision.
If you don’t receive these instructions, you can still request your report directly from the credit reporting agency listed on your declination letter.
Also, not to worry, your credit report won’t indicate whether a loan application was denied, so getting denied won’t impact your credit score in any way.
There can be errors in your credit score – make sure to check!
Between the credit bureaus and the creditors that play a part in developing your credit report, mistakes are bound to happen every now and then. These errors can lower your credit score and be a big headache to fix.
Common errors include outdated information, incorrect payment statuses, wrongfully duplicated negatives, and most importantly, fraudulent accounts. You should eliminate any chance of error by very carefully going through your credit history. If you find anything that looks unusual, take the proper steps to dispute your credit report with your bank.
Your income may not be high enough
Income is an important feature when determining your eligibility for a loan, since it is going to be the main way to repay your loan. The lender needs to be able to have peace-of-mind that you are earning a regular income and that it is high enough.
You may find that some lenders require your earnings to be a minimum of $800 or $1,000 per month and some will allow you to be employed part-time and only earning $500 per month – but this could vary from lender-to-lender.
The lender considers that you have a monthly income, but will have other financial commitments such as rent, food, transport, so they will need to calculate how much you can borrow against your income and other outgoing expenses. By asking to borrow too much money, the lender could think that you are living beyond your means and decline you outright.
Your debt-to-income ratio may be too high
When applying for a loan, the lender will look at your affordability and debt-to-loan ratio – and this considers how much you can afford to borrow compared to what you can afford to repay.
You can calculate this ratio by dividing your total monthly debt payments by your monthly gross income.
If your debt-to-income ratio is too high, it’s a sign that the lender believes you may have a tough time keeping up with all your payments.
To improve your chances of getting approved the next time you apply, work on paying down some of your debts.
It might not actually be your fault! Sometimes the lender cannot payout!
Although this reason for getting denied is less common than the above, it is possible that your application was declined because the lender couldn’t grant anymore loans that month.
Lenders are businesses after all, and they do not necessarily have unlimited funds. Some loan companies may have a certain number of loans they can distribute each month (e.g 100 or 5,000) or perhaps they can only afford to lend out a certain sum (e.g $1 million)
Lenders may have a stricter or looser criteria depending on their targets or access to funding that month. You may find that despite being a good candidate, the lender simply cannot fund any more than month, or sometimes they are very strict and will only approve the very best customers.
How to increase your chances of being accepted
Lenders are required to provide an explanation letter for rejected applications. If you’re rejected, read through the letter and determine what can be remedied.
For example, you can work to improve your credit score or pay down high-interest debts to improve your debt-to-income ratio.
You can also try to reapply with a cosigner—someone with a high credit score and a secure income—or opt for a joint personal loan, where co-borrowers share both the loan funds and responsibility for repayment. Both can increase your chances of approval.
Improving your credit can take time. But if you do it right, you could save hundreds of dollars or more the next time you apply for a loan.