Whether it’s buying a home, funding education, or growing a business, people have big goals. At the same time, these goals cost a lot. Thankfully, loans can serve as an important financial tool to achieve them. However, not all loan applications are successful, especially with bigger loans.
To help your large loan get approved, you must understand why money lenders in Singapore sometimes reject such applications. The common ones are as follows:
Creditworthiness plays a pivotal role in loan approvals, as it assesses an individual’s ability to repay the loan. Money lenders in Singapore meticulously evaluate creditworthiness to assess risk.
Low credit score
Like traditional banks, licensed moneylenders assess credit scores to gauge applicant’s creditworthiness and manage lending risk.
Imagine you have submitted a loan application to a licensed money lender in Singapore, hoping to secure the significant funds you need to expand your business. You have been running his business successfully for years and have a stable income stream. But when the money lender did a credit score check, they found out you have a low credit score.
To money lenders, a low credit score is a sign of increased credit risk. Your past financial setbacks will worry the moneylender, as it indicates your inability to manage and pay a bigger loan.
Nevertheless, some moneylenders will give you a chance. The catch is that they will offer you the loan at a higher interest rate due to your weak credit profile, or approve a smaller loan amount than what you initially requested.
High debt-to-income ratio
The DTI ratio is a pivotal factor that moneylenders use to assess an applicant’s capability to manage additional debt. This is the percentage of your monthly income that goes to your debt payments – credit cards, student loans, car loans, mortgage, etc. To compute it, use this formula:
DTI = monthly gross (before-tax) income / monthly debt payments
A high debt-to-income (DTI) ratio can be a red flag for lenders and affect the approval and terms of the loan.
Imagine you are a staff writer working for a publishing company in Singapore with a monthly income of $5,000. You want to secure a loan of $100,000 to start your own small publishing company. And you have existing debts, including a car loan, personal loan, and credit minimum payment with a total of $2,650.
That means your DTI ratio is 53%, which is significantly above the recommended threshold of 36%. The money lender may consider the amount of the ration as a sign of financial stress to qualify a new credit, as a significant portion of your income is already allocated to debt repayment, given that 53% is relatively high.
Qualifying income isn’t enough
When it comes to larger loans, moneylenders assess your income to determine your ability to manage repayments. If your income does not align with the lender’s criteria because of insufficiency or many financial obligations relative to it, your application may be declined.
Your income must be consistent and adequate to let you afford your loan payments. Unreported cash income or certain bonuses and commissions may not contribute positively to you with loan approval aspects.
External economic factors can influence lending decisions. During uncertain economic times, money lenders in Singapore may adopt a more cautious approach that affects their risk assessment. Certain industries or sectors may face additional scrutiny due to associated risks during challenging economic times.
For example, Jeanette has been planning to expand her small IT consulting business. She wants to invest in new equipment and hire additional staff. She is securing financing for this expansion and aims to take out a significant business loan.
But before she can submit her loan application, the country is hit with an economic downturn due to global market factors and a decline in demand for IT services.
Banks and money lenders are cautious about lending to businesses affected by economic crises, as they are concerned about increased loan default risks due to the uncertain economy. In this case, they perceive Jeanette’s business as high risk due to the reduced revenue and increased uncertainty in the market, and will likely reject her loan application.
Personal unfortunate events
Let’s say you’re a marketing manager and have been planning to purchase your first home. You’ve been diligently saving for a down payment and have maintained a good credit history. Your financial situation appears stable, and you decide it’s the right time to apply for a mortgage loan to buy your dream house.
However, an unexpected and significant life event occurs. Your ageing parents suffer a medical emergency so you end up taking on unexpected expenses related to their medical care, travel, and lodging. Your previously stable financial situation is now disrupted because of the unexpected expenses associated with your parents’ medical emergency.
As a result, your mortgage loan application may be rejected or postponed. The money lender or bank may advise you to stabilise your finances and address the recent financial strain before reapplying for the loan. Alternatively, they may offer a smaller loan amount or less favourable terms than originally anticipated.
This example shows how an unexpected life event in person can disrupt someone’s financial situation. Disruptions like these negatively affect an individual’s ability to secure the loan or result in less favourable loan terms.
Insufficient loan application preparation
A well-prepared loan application is essential. Errors, inconsistencies, or a weak loan proposal can hinder approval chances. Money lenders in Singapore appreciate organised and comprehensive loan applications that demonstrate responsibility and seriousness. On the other hand, failure to demonstrate these traits is viewed as a lack of seriousness or responsibility, which can result in rejection.
Money lenders rely heavily on documentation to evaluate creditworthiness. Failure to provide adequate proof of income, incomplete financial records, or missing required documents can lead to rejection by money lenders who prioritise thorough document verification. So, be ready to provide complete and accurate documents to ensure money lenders about your ability to manage a larger loan.
Avoiding rejection: it’s all about trust and timing
Loans are essential to achieving personal and financial goals, but applying for bigger loans can be challenging. Even with a stable income, you can still be rejected due to credit score issues and bad timing. So make sure you meet the bank or moneylender’s criteria and apply at the right time to get their approval.