Did you know that despite a good credit score your personal loan application can be denied? Don’t be fooled by what the credit score adverts on TV tell you. They make it sound as if a high credit score is all you need to secure a loan.

In truth, there are other factors a financial institution considers when deciding if you qualify for a personal loan.

  • How much you earn

Your income is an important indicator of your ability to pay off a loan. Banks want to see that you have a steady stream of money coming into your account.

It increases the financial institution’s confidence in you as a borrower. After all, how are you going to pay a loan back if you don’t have an income?

You’ll need to supply salary slips from your employer. Otherwise, you’ll need to show your income from investments in your bank statements.

It’s an integral part of demonstrating to the bank that you can feasibly make repayments.

A bank will view the potential repayment as a percentage of your income. If the percentage is too high, your application will be declined.

  • History of employment

Providing three months’ salary slips is not enough to instill confidence in a bank. You might only have been working for the last three months after two years of unemployment.

Your employment history might reveal a tendency to jump ship and change employers frequently.

Consistent employment indicates a strong likelihood of being able to make loan repayments. Having worked for a single employer for the last two years or more is even better.

  • Debt

If a significant portion of your income is devoted to paying off debt, you’re not an attractive loan proposition to a bank. When the ratio of debt repayment amount to income is high, there is a strong likelihood you won’t be able to make monthly loan repayments.

Financial institutions set a maximum debt to income (DTI) ratio. Requirements differ from one bank to another. However, it is generally accepted that debt repayments should not exceed 35% of your income.

During the vetting process, your DTI is calculated. If it is higher than the bank’s set percentage, your application will be denied.

  • Other loan applications

If you’re making lots of applications for loans from different banks, it raises a red flag. Why are you applying for so many loans?

Will you be able to pay them all off? If it seems that you’re going on a borrowing spree, your ability to repay a loan comes into question.

A sudden flurry of loan applications suggests you’re in desperate need of money. It can also be interpreted to mean that you lack the intention or the ability to make repayments.

  • Collateral

Getting a secured loan is far easier than being granted an unsecured loan. An unsecured loan requires no collateral. However, it is very risky. It is the equivalent of the bank giving you the money and crossing its fingers that you’ll pay it back.

A secured loan requires collateral assets. These include a house, insurance policy or sum of cash. The financial institution can seize these assets if you default on the loan.

The knowledge that it has recourse to recoup the loan amount makes the bank more receptive to lending you money.

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