Factors That Lead to Payday Loan Application Rejection
When you’ve been declined for a payday loan, it can be frustrating when you felt that your payday loan application was very easy. In most cases, being declined by a lender does not indicate that you made an error in your loan application process. It is generally due to a lender unable to verify at least one of the several elements used to reduce their risk when making payday loan decisions.
Below, we will provide explanations on some of the common reasons why lenders decline payday loan applicants, along with some things you can do before applying again. The information shared here is for general educational purposes by our team at SlickCashLoan.
Why Rejections Happen
The payday loan is a small, temporary loan. The lender’s focus is always on how you will make your timely repayment on this loan, without getting behind on your other monthly bills.
In determining if you are able to do so, a lender reviews your income history, your banking activities, and your total existing debt, as well as verifying the accuracy of the information provided by you.
No current income – No current income
Many payday lenders will want proof of your present income. A lender can deny your request for a loan if they have no evidence of a regular paycheck, an ongoing benefit deposit, or any other regular money that is being deposited into your account on a consistent basis. Lenders need to be able to confirm repayment with steady money coming into the account.
If you are between jobs, waiting until you are back working and showing a regular pay pattern, such as a first direct deposit, can provide this confirmation and make your application more acceptable.
Income that is not easy to verify
Borrowers who receive legitimate income are sometimes denied due to difficulty in proving this income. Examples of this type include:
- A new employee without recent pay stubs.
- Self-employed individuals whose records do not fully support their income level.
- Individuals receiving cash as income (e.g., tips, etc.) for whom there is no evidence of these deposits through bank accounts.
Acceptable documentation varies by lender; some lenders will approve a loan based upon bank statements showing regular deposits, while others will require pay stubs, benefit letters, or tax returns.
Too Many Recent Short-Term Loans
Multiple payday loans, frequent advances, or back-to-back borrowing are the most common reasons for loan denial. Lenders have concerns about whether you can make repayment on top of all of the other payments you are making.
Even though you are currently making payments on a loan, a high volume of short-term loans could indicate that your next paycheck has already been committed to other financial obligations. As such, lenders will generally want to avoid approving a new loan that could lead to additional fees or missed payments.
Paying down the balance of an existing account before requesting credit will increase your chances of being approved for credit. Also, it will prevent you from having to make multiple payments in the same pay cycle.
Bank Account Issues
Almost all payday lending requires an active checking account. Checking accounts provide lenders with a way to view bank activity to verify income, deposits, and regular bill payments.
Low balance, overdrafts, or returned payments
Lenders will review your banking history to determine whether there is anything unusual going on with the account. Repeated overdrafts, multiple NSF (non-sufficient funds) fees, or multiple returned payments could indicate that there is financial pressure, even if the borrower has money coming in.
Also, when you take out a short-term loan, the lender will need to know exactly when to collect the loan payment. If the repayment date creates a problem with your account balance, the lender may decide that the timing risk is too great for them to lend to you.
New or inactive bank account
A very new bank account or an account that doesn’t show a lot of activity might not give the lender enough history to review. Therefore, some lenders may deny you simply because they can’t confirm that you have a consistent deposit history in place.
Credit History Concerns
While payday lenders advertise flexible requirements, a credit report may still be used to evaluate the borrower’s creditworthiness. A lender may request a copy of your credit report or use other reports to review your borrowing and payment history over a period of time.
A low credit score or past negative reporting could be one reason a lender denies you; however, this is not always the main reason. Most denials occur because the lender determines that your income or bank account activity does not meet the lender’s standards, regardless of your creditworthiness.
Information Mismatch or Verification Problems
An application can be denied for a simple reason: the information provided does not match the lender’s verification process for identifying and verifying income.
Common errors include:
- Your name, address, or phone number does not match the public records.
- There is a typographical error in your social security number.
- Your bank account is not registered under the name you entered.
- You listed your employer incorrectly.
These types of mistakes can be corrected and, therefore, should not be viewed as a permanent denial. Prior to reapplying, it would be wise to verify your application information and ensure your supporting documentation matches what you entered.
State and Legal Limits
Payday loan laws vary by state. Some states place restrictions on how much money you can borrow, while others restrict how often you can borrow. Some states provide additional consumer protections, such as requiring a cool-down period between loans. Some states do not permit payday lending at all.
Even though a borrower may qualify in one state, the exact same application may be denied in another state based on local laws.
Bankruptcy or Recent Financial Events
Depending on the lender’s specific policies, a recent bankruptcy may negatively impact your chances of obtaining approval for a loan. While some lenders will automatically deny applications submitted by individuals who have recently filed for bankruptcy, others may review the entire financial situation, including the applicant’s present income, bank account activities, and current loan obligations, prior to making a final determination.
Regardless of how a lender views a recent bankruptcy, the fact remains that bankruptcy itself is not a main determinative factor regarding approval for a payday loan. State-specific regulations may also dictate how a lender handles applicants with recent bankruptcies.
Gambling Activity and High-Risk Spending Signals
Some lenders look at your account history to see if you have patterns of activity that they believe will be high-risk. These include multiple transactions from online gambling sites and frequent spikes in how much you spend. Most lenders do not use this type of analysis, and occasional transaction related to entertainment is rarely enough to cause an application to be denied.
However, if there are many high-risk transactions and you usually have very little money in your accounts, it could raise your chances of being denied.
Welfare or Benefits as a Main Income Source
It’s possible for a lender to consider the benefit payment as income, but many will not. It usually depends on the lender’s policy, or whether the benefit payments appear regular in the deposit history.
Having all of your documentation organized, such as a copy of your award letter and bank statements showing the benefit payments being deposited on time, can help you obtain approval; however, there is no guarantee of approval since each lender has their own set of policies regarding this matter.
Getting Paid in Cash
Cash payments are commonplace in many jobs. The problem with cash payments is the documentation required. A lender will likely have difficulty verifying that income was received if it has never been placed into a bank account.
Documentation of your income will assist when you receive cash for a job. Many people simply deposit all of their cash income into their checking account so they can view the deposits on their bank statement. Lenders might still ask for pay stubs or other proof.
What to Do Before You Apply Again
If you’re denied for a loan, you can most likely increase your chances of approval by simply improving a few fundamentals.
First, check the accuracy of your information on your application (name, address, and banking information) and that it matches all the documentation you submit. Check and fix typos. Try to use consistent formatting throughout your application and supporting documentation.
Next, think about timing. Since payday loans are short-term loans, timing is important. If you frequently have low balances just prior to payday, lenders may be concerned that an automatic payment could fail. Lenders will be able to see this in your account activity, and it’s possible to get approved when your account has a more stable balance, and your recent deposit history is visible.
Then review your existing debt. If you currently have a short-term loan payment that is scheduled to come due, taking on another loan increases the risk. It is possible to reduce the risk by paying off some or all of your current debts before applying for a new loan.
A Note on Responsible Borrowing
The purpose of a payday loan is for short-term use. Therefore, if you find yourself using short-term loans regularly, this could indicate that your monthly expenses exceed your monthly income. As such, we encourage you to take a moment to review how you can reduce your expenses, adjust your due dates, or create a minimal financial safety net.
It would also be wise to carefully review the total costs associated with the loan prior to accepting the offer (fees, repayment dates, etc.), as well as what will happen if a payment is late. Clear terms help you avoid surprises.
Conclusion
Typical reasons for payday loan applications to be rejected include:
- Income that can’t be verified, or is missing;
- Bank accounts show high levels of risk in making payments.
- Evidence of excessive short-term lending recently.
- Problems with verifying your identity.
- Or limitations set by State rules.
To apply for a payday loan again, make sure to provide complete and accurate information; provide steady proof of your income; show evidence of a consistent banking history; and create a repayment plan that will allow you to repay it during your next pay cycle.