Loan declined due to affordability
Have you ever had a loan declined? When you first find out, your heart sinks and you instantly ask “why?” You are given a reason, which you have no choice but to accept. It means that whatever you wanted now can’t happen, and that hurts.
Why Are Loans Declined?
There are many reasons why a loan can be declined. Generally speaking, all lenders have policies that they must abide by otherwise they could lose their credit license. Here are three of the most common reasons why a loan is declined, but believe me there are many other reasons too!
1. Affordability
All lenders will have a way of calculating if you can afford the repayments on a loan. Despite whether you are convinced you can make the payments, the lender must conform to their affordability calculator, and if it says you can’t afford it – then your loan will be declined.
According to the National Credit Act, credit providers are not required by law, to assess affordability of a borrower before providing access to credit.
Affordability is measured by net disposable income. This is calculated by using the applicant’s gross income, net income and fixed monthly expenses.
If monthly repayments exceed one third of the applicant’s net monthly income, affordability may be declined. Why loans declined due to affordability may be a good thing:
As a loan applicant, you need to be able to afford to make repayments on the loan you’re applying for. It’s your responsibility to make sure that you assess your affordability before applying.
Keep in mind that the more disposable income available, the more likely the loan is to be approved. If your application is declined, you should take it as a sign that you may be over-indebted.
2. Credit History
When you apply for a loan, you will need to sign or tick a consent form allowing the lender to do a credit check on you. This check basically allows the lender to access your credit file that is held by a credit-reporting agency. On this report it shows any loans you have applied for, your current and previous employment and addresses, and very importantly if you have ever defaulted on paying any loans or bills (such as telephone, rates, water, electricity etc.) Most prime lenders (like Banks) have very strict policies regarding credit history, so if you have ever had any missed payments or defaults, you can be instantly declined and you will need to go to another lender who has a policy that accepts bad credit history.
3. Security
Depending on the size and purpose of the loan you want, will determine if you need to provide security for the loan. For example, if you are buying a house, the lender will register a mortgage against the house as security for the loan. If you are buying a car, often the lender will require the car as security, so they will list an interest against your vehicle through PPSR (Personal Property Securities Register). If you only want a small loan, say less than $3000, often you are not required to provide security, so this would be called an unsecured loan. Credit Cards and Store Cards are a form of an unsecured loan.
