If you apply for a loan and get denied, understanding the reason for the denial can help you determine your next steps and how to improve your odds of approval next time.
If youve recently been denied a loan, youre not alone. Understanding the reasons why your loan was denied can help you determine your next steps and improve your chances of getting approved the next time you try. Even if the sting of denial may still be fresh, heres what you can do.
Getting denied for a loan can be frustrating and disheartening. However, don’t lose hope! There are steps you can take to improve your chances of getting approved next time. In this article, we’ll explore why your loan application may have been denied due to bank account activity and what you can do to fix it.
Why Was My Loan Application Denied Because of Bank Account Activity?
When you apply for a personal loan, the lender reviews your bank account statements and activity as part of determining your eligibility. There are a few red flags in your bank accounts that could lead to a denied loan application:
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Irregular income deposits – If your income deposits are uneven or sporadic it could signal unstable or insufficient income to the lender. They want to see regular predictable direct deposits.
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Overdrafts – Having a history of overdrafts indicates you may be living beyond your means and could struggle to repay the loan,
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NSF fees – Non-sufficient funds fees arise when you attempt to make a payment without enough money in your account. This suggests poor money management.
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Cash advances – Taking frequent cash advances from your credit card can imply you’re depending on credit to stay afloat.
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Gambling transactions – Frequent withdrawals at casinos may make the lender see you as a credit risk.
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Payday loan deposits – Payday loans are risky credit products. Seeing deposits from payday lenders raises concerns.
So in essence, any suspicious or high-risk transactions could get your loan application rejected. The lender needs to trust you’ll use the money responsibly and have the means to pay it back.
How to Improve Your Chances of Loan Approval After Being Denied
If your loan application was declined because of bank account activity, don’t panic. Here are some tips to strengthen your financial profile and improve your chances of getting approved next time:
1. Pay Down Existing Debt
If you have high balances on credit cards or other debt, focus on paying those down. This will help lower your debt-to-income ratio and demonstrate you can manage debt responsibly. Shoot for getting balances below 30% of the credit limit.
2. Build Your Credit History
Review your credit reports and focus on improving your credit score. Do things like:
- Make all loan and credit card payments on time each month
- Keep credit card balances low
- Limit new credit applications
- Resolve any errors on your credit reports
This will demonstrate responsibility and reduce risk for the lender.
3. Boost Your Income
If you have inconsistent income deposits, find ways to increase and stabilize your earnings. Things to try:
- Ask for a raise at your job
- Pick up a side gig for extra cash
- Trim expenses to free up more money
Having reliable income will ease concerns about your ability to repay.
4. Consolidate Debt
If you have numerous high-interest debts like payday loans or credit cards, consider consolidating through a debt consolidation loan or balance transfer credit card. This can help simplify payments and save on interest.
5. Maintain Positive Banking Habits
Going forward, exhibiting responsible banking habits will help reassure lenders:
- Avoid overdrafts by tracking account balances diligently
- Build savings and keep a buffer in your account
- Make loan payments on time every month
- Limit cash advances and other high-risk transactions
Showing consistent prudent money management will help demonstrate you are now a good credit risk.
6. Choose Lenders Carefully
Some lenders place more emphasis on bank account activity than others when reviewing applications. Do your research to find lenders that focus more on credit reports and scores when underwriting loans.
Online lenders and credit unions may offer more leeway than big traditional banks when it comes to bank account history.
7. Provide Explanations
With your next loan application, include documentation and explanations for any past red flags on your bank statements. For example, noting an overdraft was due to a temporary medical expense.
Providing context helps assure lenders that high-risk transactions were outliers and not typical behavior.
8. Consider Secured Loan Options
If you’re still struggling to get approved for an unsecured personal loan, explore secured loan alternatives which require collateral like:
- Secured credit cards (require a cash deposit)
- Home equity loans
- Car title loans
The collateral reduces risk for the lender, boosting the odds of approval. Just be sure to weigh the costs.
9. Get a Cosigner
Asking a cosigner with good credit to sign onto your next loan application can help you get approved and get a better rate. Just be sure they know they’ll be responsible for repayment if you default.
10. Prequalify Before Applying
Many lenders allow you to prequalify and check rates without a hard credit inquiry. Prequalifying gives you a good idea of your approval odds before you apply.
Alternatives if You Need Funds Before Securing a Loan
If you need money now and will need some time to improve your financial standing before a loan, consider these options:
- Borrow from family or friends – Be sure to outline repayment terms clearly.
- Take out a home equity loan – If you have sufficient equity.
- Get a cash advance on your credit card – Expensive, but fast access to cash.
- Pawn or sell assets – You can buy them back later.
- Pick up gig work or a side job – Apps make finding work easy.
The key is finding a temporary solution that won’t create lasting damage as you position yourself to get approved for affordable loan options in the future.
Don’t Lose Hope!
Getting denied a loan due to bank account activity can be discouraging. However, take it as a learning experience and opportunity to improve your financial health going forward.
With a mix of the strategies above, you can get back on track and demonstrate to lenders you are now ready for the responsibility of borrowing money. Be patient with yourself as you work step-by-step to build your profile.
With diligence and commitment to positive money habits, you can recover from past mistakes and unlock affordable credit options. Don’t lose hope if a lender declines you now. Use it as motivation to show them and yourself that you are on the path to financial success!
Getting Denied Does Not Hurt Your Credit Score
When you submit a credit application, the lender or creditor will generally run a hard inquiry on one or more credit reports, which will be notated on your reports. For most people, a hard inquiry knocks fewer than five points off their credit score, but that little dip will not last long—12 months at the most.
If youre denied, though, it doesnt have an additional impact beyond the initial inquiry. If youre unsure about whether youll qualify for a loan and want to avoid a hard inquiry, consider lenders that offer prequalification. This process allows you to gauge your eligibility and even view initial rate quotes with just a soft inquiry, which wont impact your credit scores.
Understanding Why Your Loan Was Denied
If your loan application is denied, the lender will send you whats called an adverse action letter that explains why.
Your credit history and your income are the primary reasons a lender may deny your application, but depending on the situation, there may be other reasons as well. Here are some of the potential factors that could contribute to your denial:
Your credit history and credit scores are primary factors lenders consider when you submit a loan application. Most negative items remain on your credit reports for seven years, but their effect on your credit typically lessens over time.
If lenders see any significant negative items on your credit report or other red flags, they may determine that, as a borrower, youre too risky to approve at this time. Common credit report items that can affect your score and potentially contribute to a denial include:
- Bankruptcy
- Foreclosure
- Collection accounts
- Delinquent payments
- High credit card balances
- Too many recent credit inquiries
- Not enough credit history
You can also be denied if your credit score is lower than the lenders minimum requirement. To prevent this from happening again, make sure you know your credit scores and shop around for loans that are targeted to your credit range.
If your lender denies your loan application based on income, two issues are the likely culprits. The first is that your income doesnt meet the lenders minimum requirement. Because most lenders dont publish this information, its hard to know if your income is high enough to meet their standards unless you ask or apply.
The other reason is that your debt-to-income ratio (DTI) is too high. You can calculate this ratio by dividing your total minimum monthly debt payments by your monthly gross income.
Most lenders require a DTI of 50% or less, and mortgage lenders may go as low as 43% or even lower. If yours is too high, lenders could view you as unable to afford an additional loan payment. To improve your chances of getting approved the next time you apply, work on paying down some of your debts—or increasing your income.
Denied For A Bank Account? – ChexSystems Explained
FAQ
What is the most common reason a bank will deny a loan request?
Why did my bank decline my loan application?
Why is my loan application being declined?
What will most likely cause a lender to deny credit?
Why was my loan denied?
Here are some of the common reasons loans are denied. Your Credit Score Was Too Low. Most lenders have a required minimum credit score. If you don’t meet the requirement, your application will likely be declined. Your credit score is important because it gives the lender a quick measure of your credit and repayment history.
What happens if a loan application is denied?
Under the Equal Credit Opportunity Act, lenders must disclose the reason for denying your loan application as long as you inquire about it within 60 days of the decision. This is known as an adverse action notice. Knowing this information is key to developing an effective strategy to get approved next time.
Why was my personal loan application rejected?
Personal loan applications can be declined for a variety of reasons. To find out why you were rejected, consider calling the lender to ask them directly or review the adverse action notice you received upon or after denial.
Why does my lender deny my loan application based on income?
If your lender denies your loan application based on income, two issues are the likely culprits. The first is that your income doesn’t meet the lender’s minimum requirement. Because most lenders don’t publish this information, it’s hard to know if your income is high enough to meet their standards unless you ask or apply.