Reason #1: Bad or zero credit history
Credit history is information about how a potential client previously performed obligations on various debts. These data are stored in the credit bureaus, the bank requests information from them before approving the loan. The spoiled degree of the credit history can be different – the bank can turn a blind eye to previously admitted delays in payments of up to 5 days (especially if there were few of them).
Delays of one month or more (especially over 90 days) already really spoil the credit history – if the bank issues a loan, it will inevitably insure against losses and increase the interest on the loan. Outstanding obligations, and even more so judicial foreclosure and sale of collateral, actually make a borrower not potential to issue a bank loan. The complete absence of a credit history can also become a reason for refusing a loan, since the bank does not know how the client will fulfill his obligations. This is more true for a large loan, but here the bank will analyze other factors – especially the borrower’s income.
Reason #2: Low income rate
In fact, this is the key reason for refusing a loan. The bank will definitely assess the level of the client’s potential debt burden. If the borrower intends to pay off more than 40-60% of his monthly income on a loan, then the probability of disapproval will be close to 100%. Suddenly, a very high salary can also become a reason for refusing a loan – not every bank is interested in a very quick debt repayment.
Reason #3: The popularity of the scoring system
The loan approval process in banks is automated, a large number of client reliability parameters are checked by a computer program – this is scoring. The system can check both work experience and higher education, possible criminal record. The scoring machine also analyzes the documents provided by the client. In large banks, scoring can also be carried out according to the borrower’s profiles on social networks. The final decision on issuing a loan will be made by a bank employee, but the opinion of a computer about a person means a lot.
Reason #4: External signs
This valuation method is not yet computer controlled and is under the full control of the bank manager. Bad clothes, bad appearance, alcoholic amber and vague answers to intelligible questions will clearly not help to successfully take out a loan.
Reason #5: Loan for the wrong purposes
Lack of understanding by the borrower of his purpose can also be denied to issue a loan. Going to a bank for a cash loan for a car, home or startup is not a good idea. Using a targeted program (car loans, mortgages) allows you to make at least the first step of the borrower correct.
Why do banks not disclose the reason for refusing a loan?
What is the reason that banks are so reluctant to explain the reason for the refusal to issue a particular type of loan? And what are the general reasons for refusal to apply for a loan? Let’s understand these issues in more detail. In the USA, 20% of the total number of borrowers who apply to the bank are denied a loan. At the same time, not every bank is in a hurry to explain the reason for the refusal, arguing that credit organizations are not at all obliged to do this.
Rule of nondisclosure of the reasons
In European countries, banks always provide a report due to the refusal to issue a loan to their clients. On the contrary, US credit organizations stubbornly refuse to follow the example of their European colleagues. First of all, this is due to the fact that each bank cares about its “security”. Bank financiers try not to disclose the reasons for refusing to issue a loan because of fears that borrowers, having analyzed in detail the reason for the refusal, next time manage to bypass certain requirements of the bank in the right places, deliberately embellishing or omitting the information you need about yourself.
It is not difficult to assume that the borrower, having received a refusal with a detailed explanation of its reason, will certainly change his behavior and by contacting another bank, he will most likely receive a positive response to the loan request, thereby exposing the bank to certain financial risks. In other words, banks are simply afraid of an increase in the number of fraudsters among their clients.
There is also an unspoken opinion that banks do not want to explain the reason for refusing a loan on their own initiative. That is, simply because they do not want to do this. Despite the assurances of banks that any refusal in a loan is connected only with the economic situation within the bank itself, but in no case with the political views of the client, his nationality or social status, there is still a certain category among the population of cooperation with which credit organizations are diligently avoiding. First of all, we mean clients with large families, single mothers and fathers, representatives of the southern republics and other potential borrowers, whom banks may refuse even if the client is fully solvent. Therefore, it is not surprising that banks in such cases simply will not argue the reason for the refusal.