Have you tried to apply for a line of credit and it was denied by your lender? Sometimes it’s not always obvious what you did wrong for your credit to be declined. One of my friends, who runs a wholesale store recently tried to apply for a loan to expand his history and to her shock, it was denied. she has never taken a loan before and her credit rating was good. She asked me to dig around and I found out she had a late payment for her HELB loan when she had finished her diploma and the agency had listed her in CRB. Even though she cleared the HELB loan, her name remained in the CRB and we had to go to the HELB and ask them to purge her name to clear her to get a loan. Cases like this are not unheard of in Kenya, and it’s important to understand the lender’s checklist so that you might not find yourself in a fix when you need a line of credit.
what are the factors that lenders use to determine who to lend to?
Lenders use several factors to determine loan eligibility and make lending decisions, here are ten major factors that lenders consider:
- Credit history and score: A borrower’s credit history and score reflect their ability to repay the debt on time and in full. A good credit history will give the lender confidence in your repayment ability since they can see you have taken credit before and have come through during payments. To lenders, your ability to repay far outweighs any other criteria on this list. credit score will determine the rate the bank sets for your loan, and it’s important to ensure you keep your credit score high during the entire period of the loan to avoid an increase in your loan interest.
- Income: Lenders want to see that the borrower has a stable source of income that will support regular loan payments. Furthermore, your income is likely to be the main deciding factor on how much you can borrow and the time it will take you to repay your loan.
- Employment status: The borrower’s current employment status and job stability are important factors for lenders. Lack of employment means you lack a source of income, and no lender will give out a loan without a means of repayment, even with collateral available.
- Debt-to-income ratio: Lenders want to see that the borrower has enough income to support loan payments, and not too much-existing debt. if your debt-to-income ratio is too high then there is a chance of defaulting which can give lenders cold feet lending to you.
- Collateral: Some loans, such as secured loans, require collateral, which is an asset that the lender can seize if the borrower defaults on the loan.
- Loan purpose: The lender wants to understand the purpose of the loan and how the funds will be used. Understanding the purpose of the loan helps the lender assess the risk involved in lending money. For example, a loan for a risky business venture is considered riskier than a loan for a secure investment such as a home purchase. Further, understanding the purpose of the loan also helps the lender prevent fraud by ensuring that the funds are used for the intended purpose and not for illegal activities. In some cases, the purpose of the loan may determine if the loan is subject to certain legal requirements, such as disclosure and consumer protection regulations.
- Loan amount: The loan amount requested and the borrower’s ability to repay the loan will also be considered by the lender.
- Repayment term: The loan repayment term and the borrower’s ability to make regular payments over the agreed term will also be evaluated.
- Interest rate: The interest rate charged on the loan is also a factor, as it affects the cost of borrowing and the size of the loan payments.
- Market conditions: Lenders will consider the overall economic climate and market conditions when making lending decisions.
These are the main factors considered by lenders, but the specific criteria may vary depending on the type of loan and the lender’s individual lending policies.
why was my credit request denied?
There could be several reasons why you were turned down for credit, some common reasons include:
- Poor credit history and low credit score: A low credit score and a history of late or missed payments can negatively impact your creditworthiness and lead to loan rejection.
- High debt-to-income ratio: If your existing debt is too high compared to your income, lenders may view you as a higher risk and be less likely to approve your loan application.
- Limited credit history: If you have limited or no credit history, lenders may not have enough information to assess your creditworthiness, which can result in loan rejection.
- Recent derogatory credit events: Recent events such as bankruptcy, foreclosure, or wage garnishment can significantly hurt your credit standing and make it difficult to be approved for credit.
- Employment instability: Lenders want to see stability in their employment, so frequent job changes or a history of job loss can negatively impact your chances of being approved for credit.
- Inconsistent or insufficient income: If your income is inconsistent or too low to support regular loan payments, you may be turned down for credit.
- Lack of collateral: If you’re applying for a secured loan, a lack of acceptable collateral can make it difficult to be approved for credit.
- Loan purpose: If the loan is for a risky or speculative purpose, lenders may be more hesitant to approve the loan.
- Recent loan applications: A high number of recent loan applications can indicate that you’re in financial distress and increase the risk of loan rejection.
- Incomplete or inaccurate information: If the information you provide in your loan application is incomplete or inaccurate, it can impact your chances of being approved for credit.
- Poor credit history and low credit score: Your credit history and score play a significant role in the lending decision process. A low credit score or a history of late or missed payments can lower your chances of being approved for credit.
- High debt-to-income ratio: If you have a high amount of debt relative to your income, this can make it difficult for you to repay new debt and reduce your chances of being approved for credit.
- Limited credit history: If you have a limited credit history, lenders may be reluctant to approve you for credit as they have less information about your creditworthiness.
- Recent derogatory credit events: Recent events such as bankruptcy, foreclosure, or wage garnishment can hurt your credit standing and reduce your chances of being approved for credit.
- Employment instability: Your current employment status and job stability are important factors for lenders. If you have a history of job loss or frequent job changes, lenders may view you as a higher risk and be less likely to approve your loan application.
These are some common reasons why you might be turned down for credit. If you want to improve your chances of being approved for credit, it’s important to maintain a good credit history, keep your debt-to-income ratio low, and demonstrate stability in your employment and financial situation.