Why Was My Loan Application Denied?

Why Was My Loan Application Denied?

Written by Caitlin Wood
Last Updated September 18, 2018

Being denied for a loan can be a huge setback and an inconvenience but unfortunately, it happens quite a lot. There are lots of outside factors that could be affecting your ability to get a loan like the economy and the lender you applied with. The best way to increase your chances of being approved the next time you apply is to take a look at your own financial situation. Here are the top reasons why you might have been denied a loan and a few tips on how to improve your chances.

Debt to Income Ratio 

If your debt to income ratio is too high then most lenders will not only see you as a risk but will also deny your loan application. Your debt to income ratio is the amount of your pre-tax income that goes towards making your monthly debt payments. If you’re spending too much of your monthly income on paying off your debts then most lenders won’t want to give you more credit as that will only contribute to the problem.

What to learn how to calculate your debt to income ratio? Click here

Poor or No Credit History

Credit is one of those things that you need in order to get more of it, so if you’ve never had credit then it’s hard to get credit and if you have a poor credit history then it’s unlikely that someone will want to give you more credit. Lenders will look to make sure you have a minimum credit score; every lender is different but they all want it to be pretty high as that shows that you are in fact responsible with credit. They will also look to see if you have any black marks in your credit history, items like bankruptcy and maxed out credit cards. Taking care of your credit history should always be a top priority as it can prevent you from being able to move forward in your life by purchasing a home or buying a new car.

Canadian Credit ScoreCheck out this infographic to learn how your credit score is calculated. 

Countless Inquiries

A credit inquiry is made when you apply for new credit, the lender is basically checking out your credit history. Unfortunately, having too many inquiries in your credit history can work against you if and when you try to apply for new credit. Too many inquiries tell a lender that you have been frantically trying to get new credit but that you are being rejected. Therefore, this shows a new lender what you are an undesirable candidate because others have denied your loan applications.

Employment Status

Being unemployed or having an unstable job are probably two of the best reasons why you might need a loan but unfortunately, lenders do not feel the same. Lenders want at least some kind of guarantee that you’ll be able to pay them back and that usually comes from the kind of job you have. Having no job or one that doesn’t provide a reliable income makes you a high risk and therefore could be preventing you from getting the loan you need.

Too Much Debt

If you’re currently having trouble paying off the debt you already have and you’re payments are frequently late, a lender isn’t likely to approve you for a loan. Having too much debt is a difficult thing to deal with but the good news is that once you’re on a good path toward making your payments on time and having less debt, in general, obtaining a new loan will be all the easier. You should take your denied loan application as a reminder that being debt free is something you deserve and then work hard toward that goal.

Learn How to Tackle DebtLooking to tackle your debt once and for all? This infographic is for you.

In Bankruptcy or Debt Management Program

If you’re currently filing for bankruptcy or are in a debt management program then congratulations on taking the first steps toward improving your financial situation but unfortunately, you probably won’t be approved for a loan. Bankruptcy and debt management programs show lenders that you probably can’t handle having any more debt at this time. Once you’ve finished the bankruptcy process and gone through your program you will then be able to reapply for new credit.

Check out this article for more information about applying for a loan after bankruptcy. 

Debt in Collections

Have debt in collection is when you have a credit account (a credit card or loan) that is past due by a lot and the lender that you owe money to has sent debt collectors after you. An account that is in collections is one of the worst kind of entry to have on your credit report. If you have debt in collections you will definitely be denied any new credit.

Getting Back on Track

While being denied new credit can be a significant setback, you can always improve your financial situation so that you can be approved in the future. Understanding why you’ve been denied is the first step toward getting back on track and being approved. If you’ve taken the first step toward a healthier financial future and are ready to get back in the game, Loans Canada can help!


Rating of 5/5 based on 1 vote.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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