The world we live in revolves around money. As much utopian as our intentions may be, the reality is that money makes things move. Be it a house that you want or a car, you will need money to pay for it. But when we are out of money, we look for resources and bank loans are one of the means.
Applying for a loan from a bank is easy if you know how to. Unfortunately, since the bank is committing a large sum of money for your need, it requires a few reassurances on your ability to pay it back (plus interest). The strict requirements mean that there are times that a bank can refuse your application.
To understand how to secure a bank loan, we must first understand the reasons behind the refusals:
- High Debt: Banks will always look at your financial situation and see how much you owe and have to pay back. A higher debt ratio makes them uneasy. With a significant debt already in your name, giving you a loan would increase the financial burden on you and you might not be able to pay it back. The standard rule banks apply on loans is that your debt to annual income ratio should not exceed 40%. In case you are looking for a house, the value drops to 32% and that also includes other expenses you will have associated with the house, such as insurance and other taxes involved.
- Low Credit Score: A credit score is a financial analysis of how good you are at repaying loans. Using the most common FICO method, you can fall anywhere between 300 and 850. The factors that govern your scoring are your past credit history, money held in banks, total existing debt, and how regular you are in repaying your loans in the past. Depending on the amount of loan you have requested, a score between 580 and 669 may secure you an average loan. The general rule is: the higher your credit score, the more loan you can secure.
- You Have a Debt Collector at Your Back: Banks can straight away refuse your loan request if you have a debt collector. These individuals and firms are only active if you have failed to repay a previous loan. Having a debt collector means you will not be able to pay the requested loan either.
- Your Income is too Low: Your ability to pay back a loan depends on your income. If your income is low, you will have trouble covering expenses and then the loan payment. If your expenses leave little in terms of saved money, the loan will definitely be rejected.
- Recent Job Switch: Even if you are able to show that your income is sufficient, but have recently changed a job or career, banks will be very uneasy about it. A new job doesn’t guarantee you will retain it till the repayment of the loan.
Ways to Secure a Bank Loan
There are a few ways that you can improve your situation if you are afraid a loan application will get rejected (or already has been). Use the following tips and stick to the regime:
- Clear Past Debt: Try to clear off any past debt. Start by budgeting your expenses and finding ways to reduce them. In the meantime, concentrate on saving money to pay off your largest and most crucial debt first. Don’t relax until you have most of your debts clear.
- Improve Credit Score: A better score can be achieved if you are paying your bills and other payments on time. Try to keep your build-up amount below one-third of your limit.
- Online Loans: Find a good online loan service. These loan services have lax requirements than banks and look at your current ability to pay the loan back, rather than your past history. Since they are mostly not on the banking network, your credit score isn’t hurt by taking out loans either.
- Get a Co-Signer: If you have a friend or a family member who is willing to help you out, consider taking a joint loan. The loan is graded against the combined ability of the borrowers to pay up, easing pressure on you. Be warned though: the co-signer’s score is also affected if you lag on payments.
- Broker: Sometimes using a middleman for securing loans may not be a bad idea. Though they charge their commissions and you end up paying more, they can get you the loan you want. Having better contacts in the financial institutions, they can approach banks and vouch for you.
In the end, it all depends on how you play your financial cards. It would be wise to keep your expenses in check always, with pushing your credit score as high as possible, even if you don’t need a loan. Visit 24Cash.ca for more information.