Applying for a loan is easy enough, but whether your application gets approved is another story entirely. Be it home, personal or car loan, rejection can come out of nowhere, leaving you disheartened and disappointed.
That being said, rather than dwelling on this unfortunate outcome, you can use it as a learning moment to improve your financial state.
Before we go over the next steps to take, we should go over the possible reasons as to why you were rejected in the first place.
Why did you get rejected?
Usually, a loan is rejected if the lender has sufficient proof to doubt your ability to repay the loan.
Here are some of the reasons why your loan may have been rejected.
Your credit score is too low
This is usually the first thing that a lender looks at to determine if you are trustworthy enough to repay your loan. Banks have easy access to CTOS and CCRIS reports, with this they can just as easily trace any overdue and late payments; and whether you made minimum payments or the full payment.
With this information, banks are able to evaluate your credit risk and gauge if you are a responsible individual, as well as a reliable borrower. Based on this, they can either approve or reject your application.
How do you go about fixing this issue? you should start by limiting spending and working on paying off your bills and outstanding payments one at a time. Your credit score will not improve immediately, but making a habit to make your payments on time will help fix your score over time.
If you would like some more pointers on how to improve your credit score, we have an in-depth article with some helpful tips that can help you on your way. You can find the article here.
You don’t have steady employment
Some people like being digital nomads, hopping from one job to another, or even working on freelance commissions. There is a certain freedom that comes with such a lifestyle. Unfortunately, job hopping and unstable employment is something that causes banks and lenders to raise an eyebrow.
To banks, job stability means that you are able to pay your dues without fail. Some banks may even have strict requirements, such as having at least one year in the current job. If you have the tendency to change your job every six months or more, this can be a warning sign.
Without showing proof of a steady income source, chances of getting that loan approval will be slim.
This is especially problematic for freelancers or self-employed individuals. However, you can resolve this issue by providing concrete financial documents like income tax documents, bank statements and other proof of income.
Applying at the wrong bank
This might sound strange, but can be surprisingly relevant. While all lenders have to follow the guidelines offered by Bank Negara, different lenders have their own different approval criteria and pre-requisites for loan applications within reason. It could be that you are not meeting the minimum age requirement, not in the right income band or the bank doesn’t offer to finance a particular location.
You can try applying for a loan at different banks, but there can be negative impact. Did you know that having too many rejections can hurt your credit score in the long run?
You will want to keep your CCRIS report as clean as possible, as it will ensure the banks favour you.
You have too many loans and commitments
It is fairly easy for banks to find out if you have too many financial commitments at the moment. If they see that you have multiple credit card payments and loans to make by the end of the month, they will likely not approve your new application if they believe you are not able to handle any more.
Generally, your debt-service ratio (DSR) will rise if you have more commitments to pay off each month. Although different banks have different DSR cut-off rates, it would be best to ensure that your DSR does not exceed 60% of your net salary as a general rule. Anything higher and your chances of getting that approval starts to decrease.
You can try to lower your monthly payments by taking longer tenures on your loans. In addition, you can also try discussing with your bank on how it calculates your monthly commitment to try and negotiate lower payments per month. This may help you find ways to improve your DSR ratio.
Debt refinancing and consolidation is another option open to you to help get your debt under control. You will essentially be rolling your previous debts into one loan payment, preferably at a lower interest rate. If you want to learn more about debt consolidation, we have a rather comprehensive article here.
You can’t show a credit track record
Some people prefer to avoid credit cards like the plague due to a fear of overspending. While this is technically a good way to maintain your finances, it unfortunately does you no favours when you are applying for a loan. This is because without past repayment records, the bank will not be able to know whether you are a good paymaster or vice versa.
As such, it might be a good idea to consider certain credit facilities such as credit cards for recording purposes. Alternatively, you could try utilising other financial facilities of the bank you are applying for a loan from, such as a savings or fixed deposit account. At the very least, this will help increase the bank’s confidence in you.
You income is not enough to qualify for it
Banks will sometimes require you to have a minimum income in order to gauge your ability to repay your loan. If your income is not enough to accommodate the equated monthly instalments (EMI), then your chances of getting your loan approved are slim.
For loans such as mortgages, it might be best to speak to your bank’s representative to seek alternative options on property that might better suit your repayment capability.
Your documents are not complete
Applying for a loan is a rather strict process. Sometimes, you may simply have the wrong documentation or provided incorrect details.
This is why it is important to make sure the application is done correctly so that you can avoid unnecessary hassle.
Always double check if you have all the correct information on hand with all the requested documentation. Here are the basics that you will need:
Complete and accurate application form
A copy of your NRIC
Income documents (three to six months’ pay slips, salary crediting bank statements, EA form, appointment letter, commission statements, B/BE form and more)
In addition to this, there are a few other things you can do after your loan gets rejected. These include:
Checking with the bank to find out why your application was denied.
If the rejection is based on minor errors, then correct the mistakes.
If it’s due to a poor credit report, get a free copy of your report and see what can be improved.
Talk to the bank representative to see what you are actually eligible for.
Apply for a new loan once you have corrected the mistakes.