Why you keep getting rejected for a loan and what you can do

There are 3 main reasons your loan may have been declined:

• There is a debt review flag on your credit report. 
• You have poor affordability. This takes your income and how much debt you have into account. 
• Your risk profile. This is associated with whether or not you have bad credit or no credit history. 
  

If you have a debt counselling (debt review) flag your credit report, your loan will be immediately rejected. 

Debt review flag on your credit report

A debt review flag will be placed on your credit report when you have signed up for the debt counselling (debt review) process. When you have successfully completed the debt review process, this debt review flag (warning) will be removed from your credit report. 

The reason this debt review flag is placed on your credit report is to let creditors know that they should not approve loan applications. This would be considered reckless lending. It's also to give your current credit providers peace of mind because if you are in the debt review process, your interest rates on your loans have likely been reduced. It would not be fair if you were approved for a new loan at the 'normal' interest rate. 

Poor affordability

If you have poor affordability it means that a credit lender has determined that you will not be able to make the repayments of the loan based on your current income and debt obligations.

It's important to note that different credit lenders use different methods to determine if you would be able to make the loan repayments. However, what could be useful is to calculate your debt-to-income ratio. 

Your debt-to-income ratio looks at how much you earn compared to your expenses and how much you spend.

How do you calculate your debt-to-income ratio?

List and add all your debts divide it by your gross monthly income. Multiply this amount by 100.

Example:

If you earn R20 000 per month and your debt is equivalent to R11 000, this is how you would calculate your debt-to-income ratio:

11 000/20 000 x 100 = 55%

If you find that your debt-to-income ratio is anything over 50%, it's a cause for concern and you may be over-indebted. 

Read: How do you know if you're over-indebted

Income
If you cannot show a bank or credit lender that you have a consistent income you may be declined for a loan. You may also be declined for a loan if your income does not meet the minimum requirements. 

Risk profile

Your risk profile refers to your credit history. A bad credit history can mean that you've missed payments or you have a judgement against your name. It could also be the reason you are rejected for a loan. Below we will unpack a few criteria that can contribute to you being seen as high-risk to a credit lender. 

No credit history 

If you do not have any credit history, you will be rejected for a loan because a credit lender needs to see that you can consistently pay back your loans. They can't trust that you can do so if you haven't shown a history of actually being able to do so. 

Moku Tip: You can open a store/retail account to slowly build on your credit score. 

Credit score 

Included in your risk profile is your credit score. A low credit score can negatively affect your chances of securing a loan. Even if you do secure the loan, you may secure the loan with a higher interest rate. 

Did you know: Signing up for debt counselling can help improve your credit score. Because debt counselling is a way to show that you can consistently make your debt repayments on time, your credit score will improve over time. 

What can contribute to a low credit score?

Your payment history 
Your payment history comprises 35% of your credit score, according to Experian. If you miss a payment or pay it later, this could stay on your credit report for up to 7 years.  This is why it's crucial that you make payment arrangements BEFORE you actually miss one. If you've missed payments, this will negatively affect your credit score. 

The amount of debt you have
If you have too much debt, this may negatively impact your credit score. What is also important regarding your amounts owing, is how much of your credit allocation you've used. The amount of credit allocation you've used is referred to as your credit utilisation ratio. If, for example, you've used R4900 of the R5000 credit made available to you, this may negatively impact your credit score. 

Length of your credit history 
If you haven't had your credit, and shown that you can make consistent payments for a some time, this may also negatively impact your credit score. It shows credit lenders that you have more experience with managing your debt. 

What can you do if you've been declined for a loan?

1. Do NOT apply for another loan shortly after

• The reason is that when you apply for a loan, a credit lender assesses your credit report and this is noted as a 'hard inquiry'. Too many hard inquiries with rejections can be seen as a red flag to credit lenders. 

2. Look at ways to increase your income

• One way to improve your affordability is by increasing your income. It may not always be an easy or practical route, but it is a way to improve your affordability. 

  By increasing your income, you will more likely be able to afford the loan repayments with your current debt obligations. 

 3. Reduce your expenses

• You can reduce your expenses by working on a budget, and identifying areas where you are spending too much or unnecessarily. If you do this, and you are able to successfully reduce your expenses, and in doing so, increase your income, you may be in a better position to afford your loan repayments. 

Read more: How to start a budget in 6 simple steps

4. Pay off your current debt 

• If your debt-to-income ratio is too high, this could signal that you are over-indebted and may need assistance with a debt relief programme. At Meerkat, we can reduce your monthly debt repayments by up to 50%, saving you money each month, and giving you breathing room to live. We do this through our debt counselling programme. 

  While, under debt counselling, you will not be able to take out further credit or loans, you will, after the process, be in a better position to do so. 
  
  Read: Debt counselling | Everything you need to know

5. Try applying for a smaller loan amount and save up for the rest of the amount you initially wanted

By reducing the amount you ask for, you could increase your chances of actually securing the loan. While it may not be the amount you want, an alternative could be to save up for the remaining amount. 

Who is Meerkat?

Meerkat is a financial wellness company that helps South African consumers do MORE with their money. We do this with debt repayment negotiations, providing affordable insurance and helping you kickstart an emergency fund.
Fill in the contact form on our website to receive a free callback from the Meerkat team today.