Whether it’s your car unexpectedly breaking down, a medical bill, or overdue rent, financial emergencies are always at our doorsteps. Payday loans are a source of quick-cash that many people rush to sort out such issues. It’s no doubt why so many payday loan lenders have popped up in recent times to satisfy the huge appetite for the fast-cash fixes.
Recent studies show more than 23,417 payday lenders in the US, serving 32 states across the country. And over 12 million Americans access payday loans annually. Well, this should certainly be expected, especially with the rate at which the cost of living keeps rocketing.
A payday loan comes in handy when you need that quick financial fix. But, are these short-term loans a sure deal? Can you be denied a payday loan for any reason?
Well, the answer is a resounding “YES.” Your payday loan application may be declined. Let’s dive in and see the reasons why, as well as how you can avoid that loan decline:
But, before that, what exactly are payday loans?
Essentially, payday loans are short-term funding that helps you to cover abrupt or unexpected expenditures, with a promise to repay by the next paycheck. Since they are short-term and almost immediate, these loans lenders charge extremely high-interest rates (most have APRs of 400% and above).
This means that they should only be taken during emergencies or for some unavoidable expenses. Before you apply for that payday loan, ensure that you know the exact interest rate you are being charged. You might be adding too much unnecessary burden to your paycheck.
Remember, the repayment term for these loans is usually less than a month. Therefore ensure that you can make the payments without much strain.
Common Reasons Why a Payday Loan Application May Be Declined
If you’ve once applied for a payday loan and it was denied, it’s only fair to know why. If you plan to apply for one, you need to be aware of things that might lead to your loan application being rejected. This will help you to plan better.
So, why wouldn’t you qualify for a payday loan?
1. You’ve not Met the Necessary Requirements
While payday loans are perfect fast cash solutions, a borrower still has an obligation to fulfill some requirements to qualify for a loan. Different lenders will have different requirements to be met, although there are some basic minimums that almost every payday lender will demand:
For starters, a borrower must be of 18 years and above. This makes you an adult in most states, although some platforms might raise this age bar to 21 years.
Second, you must be an American citizen and reside in a state that allows for payday loan lenders’ operation. Without meeting these requirements, your loan application will most likely be declined.
This one doesn’t have an easy way around it. For the age limit, you have to prove that you are above the required age limit. But for the residency, you can certainly shift to a state that permits payday loan businesses.
2. No Evidence of a Steady Source of Income
When borrowing any loan, the payday lender must verify that you have some steady earnings each month. Otherwise, how will they know that you can make your loan payments on time, plus the high-interest rate they charge?
Being able to prove your earnings is one step towards getting that loan that you so much need. And, not having that evidence means that your loan will keep getting rejected. Some lenders could also put a cap on the minimum monthly earnings for borrowers, something you need to confirm before applying.
If you don’t have bank records to prove your earnings, you may need an alternative to get that loan approved. For instance, if you are employed but paid in cash or are self-employed, you may still be able to prove your pay. But how?
- Keep a log – this is especially for people who receive tips regularly. IRS accepts tip logs, either written or electronic, as a means of proving one’s income. This is acceptable for tax purposes, and you can use it as proof of income to lenders, hence avoiding the disappointing decline.
- Third-party contacts – someone else reliable, such as your employer or even a landlord, might be able to prove you have some income.
- Invoices – keeping copies of invoices for work done might also help show how much money you earn monthly or yearly.
- Tax papers – independent contractors and self-employed individuals working for other businesses or people are given a 1099 form at the end of every year. This form shows in detail the total amount you’ve been paid for that year – if it exceeds $600. This can be another proof to the lender that you do earn.
Not being employed is also one of the major reasons why payday loan applications keep getting rejected. Most lenders will request proof of employment to ensure that you have a salary to help service your debt.
Remember, when applying for a payday loan, it’s an agreement you’ve entered into with the lender. The lender agrees to advance you some cash to promising that you’ll pay the amount back, with some interest before a certain date. Failure to repay the money, the lender will certainly lose money.
For this reason, the lender needs assurance that you have a stable flow of income to enable you to meet your obligations. Employment is one sure way for a payday lender to be guaranteed repayment for the money they lend out. Having a job means you are less likely to default on loan payments than a person who doesn’t have a job.
There is no special hack around this, except getting employment. This will guarantee the lender that you are not a risky venture to throw money on. So, if you need a payday loan, ensure you get employment first, whether full-time or part-time.
Alternatively, if you are in between jobs, you can prove that using your bank statement. Through your statements, the lender can see whether you have some other income source – for instance, passive earnings. Also, check whether the lender can consider your unemployment and welfare incomes.
4. Poor or Bad Credit Score
Your credit history is certainly a major determinant of your loan’s approval or decline. While we have payday loan lenders who give loans to individuals with bad credit score, most lenders use a credit check to verify your eligibility. Your credit score must be positive if you are dealing with a legit, reputable payday loan lender.
The whole reason for lenders to look into your credit history in the first place is to ascertain that you are credit-worthy and minimize their risk of losing money.
Will you be able to repay their money plus the accrued interest? Or are you among those individuals who default on every loan they get?
“Bad” or “Good” credit score will clearly show this. Many lenders will do a credit check to get a brief credit report before your loan is approved. Poor credit score means that the lender’s money will likely be lost through unmet loan payments, which lenders like to avoid.
Remember, for you to have a bad/poor credit score, it means that you either don’t pay for things on time or you are too much in debt. Either way, this may not favor your new loan application.
The best way to get your loan application approved here is to make sure that you’re back on the good credit books. You can do this by evaluating your borrowing and expenditure and identifying areas that are negatively affecting your credit score.
For instance, avoid too much debt, make timely payments on your obligations, and clear even the smallest bills on time. Ensure that you borrow responsibly and avoid relying too much on debt. This will help you to maintain a clean credit history and subsequently lead to your loan being approved.
5. Too Low Income
A payday loan lender will put a cap on the minimum monthly income a borrower ought to have in most cases. For example, most lenders need you to have a monthly income of not less than $800. Also, some rules imposed by the Obama administration, back in 2017, require that payday loan lenders determine the capability of a borrower to pay a loan but still have enough money to meet their basic needs.
This means that you may be employed and have proof of income, but the amount you earn is not enough to warrant you a payday loan. For this reason, you need to ensure that you have met the minimum income limit before you apply for the loan.
In some instances, the lender may consider unemployment and welfare incomes, so long as they are above the minimum requirement. Always ensure that you have enough information about the lender’s minimum income requirements before applying for that payday loan.
Ensure that your earnings are adequate. You may do this by getting an extra part-time job or a side hustle that adds to your overall earnings.
6. Lack of a Checking Bank Account
For your loan to be approved, many lenders will request a post-dated check from you or completion of an ACH withdrawal. This guarantees them that they will get their money on the agreed date, without delays.
These two actions need you to have a checking or savings bank account. And, in case you don’t, your loan application may be denied by most lenders.
Have a checking account. That’s right! Since this is a requirement for almost every lender, you must have an active account. This might be the only reason why your loan application is being denied.
7. Unsettled Paycheck Advances or Payday Loans
When planning to apply for a payday loan, it may be prudent that you don’t have other unpaid payday loans – unless your bank statement shows that you can still meet your obligations.
If you have some unsettled debts, lenders may be wary of approving your application, and it may be denied altogether. And, it doesn’t matter whether the unpaid debt is past the due date or current. The fact is, payday loans will add to your obligations, something that only adds to the risk of defaulting, on some, if not all.
First, you may consider settling all your unpaid payday loans and paycheck advances before applying for new ones. Better still, ensure that your earnings are adequate to support both the unpaid loans and the one you are applying for.
If your earnings support that, the lenders may still advance you the loan as the risk is not too high. You may still be able to make your payments.