17 reasons why MFIs reject loans

17 reasons why you might be denied a microloan

In fact, there are an infinite number of reasons for loan rejection: from significant overdue payments on current loans to errors in the credit history. And since neither microfinance organizations nor banks announce the reasons for rejecting an application, borrowers cannot work on their mistakes and increase the likelihood of approval for subsequent applications. Therefore, we have prepared a comprehensive list of the most likely reasons why clients most often face loan rejections.

Poor credit history

The most frequent and likely reason is a damaged credit history. As a reminder, a credit history is a dossier on the borrower of sorts. It contains all information about inquiries to credit organizations, previously issued loans and borrowings, overdue payments, and defaults. Seeing all this information, the lender can conclude how responsibly a person fulfills their obligations and whether they are worth trusting with borrowed funds.

Most likely, a small overdue payment will not be a reason for rejection. But significant defaults on debts and court proceedings will ruin the credit history so much that even the smallest microfinance organizations will not cooperate with the borrower.

Another reason for rejection is the complete absence of a credit history. Since the financial organization cannot assess the reliability of the applicant in this case, it prefers not to cooperate with them at all. 

Insufficient salary

Another common reason for rejection is a low salary. When approving a microloan, the lender must be sure that the borrower will have enough funds to repay the debt on time. Therefore, insufficient income is a serious reason for refusing to issue large loans.

At the same time, the salary level has virtually no impact on the decision-making process for small loans of up to 5,000 RUB.

High debt load

The higher the borrower's debt load, the greater the risk that they will not be able to cope with their obligations to credit institutions. Ideally, the debt-to-income ratio should not exceed 30% of the salary. This means either the borrower must have a sufficiently high income to manage all existing credits and loans, or they must not have any current debts at the time of applying to an MFI.

Loan amount is too large

If a borrower applies to a microfinance organization for the first time, the maximum available amount for them will be 15,000-20,000 RUB. A larger loan will become available starting from the second application, once the lender is confident in the client's reliability.

Recent rejection from this microfinance organization

If a borrower has recently been denied a loan, it is unlikely that they will be approved in the same credit institution shortly after. Therefore, we recommend applying to an MFI a few months later, after having improved your financial situation and credit history.

Mass submission of applications

As mentioned above, any application by a borrower to a financial organization is necessarily recorded in their credit history. This means subsequent lenders will know in any case whether their client has applied to other companies. Mass applications to several MFIs at once will very likely arouse the lender's suspicion, as they may conclude that the person is in too severe a financial situation and might not be able to handle their obligations.

False information in the application

Many borrowers, in order to increase their chances of microloan approval, provide knowingly false information in their application regarding their place of work, salary level, ownership of valuable property, marital status, and so on. Most of the time, microfinance organizations do not verify this data. However, if the lie is uncovered, the person ends up on the MFI blacklisted database, which significantly complicates obtaining credits and loans in the future.

Tax and utility arrears

Having any kind of debt gives the lender reason to question how responsibly the borrower approaches fulfilling their obligations, even if it is an insignificant utility or tax debt.

In addition, the organizations providing these services may file a lawsuit against the client. In this case, accounts and property may be seized, making the financial situation even more difficult. 

Having dependent disabled relatives

Having disabled relatives significantly undermines the budget of the person supporting them. The more children and non-working close relatives a borrower has, the higher their financial burden. Consequently, the higher the probability that they may fail to meet their microloan obligations.

Having a criminal record

Lenders try to avoid cooperating with individuals who have a past criminal record due to the high risk that the debt will remain unpaid. Furthermore, microfinance companies rarely issue loans to people who have faced court proceedings due to accumulated debts on taxes, utilities, and alimony.

Lack of valuable property

Having valuable property matters when applying for a large microloan starting from 30,000 RUB. If the borrower lacks real estate or a vehicle, the microcredit company will offer a loan on less favorable terms or refuse it altogether.

Lack of a military ID

The lack of a military ID is a primary reason for loan denials among young men. If the borrower does not have this document or a draft registration certificate with a deferment stamp from military service, there is a high probability they will be drafted into the army and the debt will remain unpaid.

Place of work

Here, it is less about the salary level and more about risks to life and health. Typically, microfinance organizations reject employees of the Ministry of Emergency Situations and the Ministry of Internal Affairs, as well as specialists in low-demand professions, because lenders want to ensure that in the event of job loss, the employee can quickly find new work and continue loan payments.

Frequent changes of employment

Frequent job changes signal to lenders that the borrower lacks reliability and is likely experiencing frequent financial difficulties. Therefore, cooperating with them poses a high risk for the microfinance organization.

Age

Despite the fact that microfinance organizations issue loans starting from the age of 18, they try to avoid working with young people who have just graduated from universities, primarily due to the lack of a stable income. Therefore, it is better to apply for a microloan between the ages of 21 and 65.

Education

Microfinance companies try not to deal with borrowers whose highest education is high school. Higher education is not a mandatory requirement for lenders, but it is better to apply for funds having at least a completed vocational school diploma.

Inappropriate appearance

If the contract is signed directly at the microfinance organization's office, the borrower will also be evaluated by their appearance. Unwashed, unkempt individuals in shabby clothing will almost certainly be denied a loan.

10 microfinance organizations that practically never reject loan applications

We have compiled a list of microfinance organizations that rarely refuse loan approvals in 2022. For convenience, the information is presented in a table.

Let's sum up

Microfinance organizations are reluctant to work with borrowers who have past difficulties repaying other loans, taxes, utility bills, and alimony. In addition, they are very likely to reject people who frequently change jobs, have insufficient income, or are unemployed altogether.

Finally, here are some tips on how to increase your chances of having your application approved:

1. First of all, you should close all your current debts, as high debt load is one of the most common reasons for rejection.
2. When applying for a large loan, it is best to confirm your income and employment with certificates from your employer.
3. If your credit history is damaged, it is better not to apply to MFIs at all, as this will further worsen the borrower's situation. In this case, we advise using any bank program designed to improve your credit history.