giving a reason for a loan

Do I Have To Give a Reason When I Apply For a Loan? What is The Best Thing To Ask a Loan For?


Daniel Tannenbaum, Founder of Pheabs Avatar

Reading Time 5 minutes

No, technically you do not have to give a reason when applying for a loan, such as a personal or payday loan. Depending on the lender, some application forms require you to state the purpose of your loan such as bills, rent, emergency, new car, business or holiday. However, very often, this is for the lender’s own data and research and it is unlikely to affect the outcome of your loan.

Are There Some Reasons Which We Will More Likely Get My Loan Approved?

Drawing on our experiences at Pheabs, there are no particular reasons that lenders are looking for that will more likely result in your loan application being approved.

Products that we offer such as payday loans are typically used for emergency purposes and to cover a shortfall in cash until your next payday from work. Reasons for needing a payday loan include:

  • Paying for home repairs or home improvements such as plumbing issues
  • Home necessities e.g new washing machine or refrigerator 
  • Paying for car repairs (the average cost for car repair is $500-$600 Source: Chime)
  • Paying for rent (the average rent in the US is $1,957 per month Source: Real Estate News)
  • Paying for childcare, school fees or children’s trips
  • Medical reasons – paying for medication or urgent treatment such as dental treatment
  • Paying for a funeral (the average cost of a funeral in the US is $7,000 to $12,000)

For life’s little emergencies and unexpected circumstances, it is understandable how someone might require an extra $300 or $500 until their next payday from work.

Are There Some Reasons Which Will Likely Cause My Application To Be Rejected?

On the flipside, there are some reasons for needing a loan that if disclosed will more likely lead to your loan application being declined. This includes:

  • Using your loan to pay off other payday loans
  • Paying for lavish holidays
  • Spending too much on gifts or Christmas
  • Paying for cosmetic surgery that is not essential

One of the biggest flags for a payday lender or online lender is if they see that you have a number of recent loans open. This could suggest that you are borrowing beyond your needs and therefore using this loan to pay off others. And if you have a large amount of debt outstanding such as $1,000 loans, they may assume that you might borrow $300 from them, but a further $700 elsewhere from other lenders. A lender does not want to be one of 10 lenders that are owed money, because if the individual becomes bankrupt, it is a long journey before they might get repaid a cent.

Other factors that may cause flags include buying a new car or for business purposes. Using personal loans or payday loans specifically would be an expensive form of credit and is not recommended for those with long term needs. 

However, in reality, most lenders want to lend out money because it is their business model and if someone has a stable income and good credit score and this all stacks up, they are likely to fund the loan and be more lenient, even if they do not have the ideal reasons for borrowing. 

What Factors Are Lenders Looking At When Determining Who is Approved For a Loan?

At Pheabs, we generally look at around 8,000 data points to determine if someone is eligible for a loan. But there are some things that stick out, including:

Basic details matching up: A starting point for lenders is if your basic information matches up with the information that you have provided in the application form. Lenders have internal systems that can tell where someone’s address is registered (often using the electoral roll or credit scoring) and it is important to see things like name, date of birth, cell phone, home address and email address matching up. This might seem simple, but even having a different name in the email address (like your girlfriend’s or spouses) does not look natural and could be perceived as the loan being for them and their criteria could be very different. Being honest and accurate in the details you provide is key to getting your loan approved smoothly.

Credit score: Using one of the main credit reference bureaus in the US, the lender will pay a small fee (like $2) to access your credit records and this information will tell them if you have any outstanding debts and how well you have paid these off in the past. Having a poor credit history can impact your chances of being approved.

Income and affordability: A lender will typically use their underwriting systems to look at your income and affordability and match up how much you have requested to borrow with how much you can afford to repay. For someone who earns a monthly salary of $800 and is looking to borrow $2,000 for a one-month loan, this is not deemed as affordable. So lenders may adjust the loan amount requested or deny the loan if it is not affordable for the individual.

Job and employment: Some jobs are more desirable than others for lenders and also the length of the person’s employment. Someone who has been employed by the same organization for the last 12 years looks more trustworthy than someone who has been at their job for 2 weeks or 1 month. Some jobs such as doctors and lawyers may be more attractive for lenders than those where they have to move around and may be hard to contact e.g army. A lender may ask for proof of employment and income subject to funding your loan.

Proof of other outstanding loans: Using credit scoring and other tools such as Teletrack, lenders can often see how many other payday loans an individual has when they apply. Whilst some US states limit the amount you can have open to 1 or 2 loans, some other states have unlimited numbers and taking on too much credit can be a dangerous thing to do and lead to a loan application being rejected.

What Can I Do To Maximize My Chances of Approval?

Be honest: Providing all your real information will only help your application move faster and smoother. Any pieces of information that the lender flags up may only slow down the application and cause there to be back and forth with you and the lender. 

Be realistic with the amount you wish to borrow: It can seem natural to ask for a larger amount to give you a safety net, but this also means more interest to pay. You need to be reasonable with how much you need to borrow for an emergency or a specific purchase and avoid borrowing beyond your means, because a lender will notice this.

Have a stable income: Having a regular job over a long period and a consistent income going to your bank account is something that lenders really like, because it gives them peace of mind that you will be able to repay your loan on time. Having a brand new job, working multiple jobs or being part-time may not give off the same level of confidence. 

Build up your credit score: Many payday lenders will actually accept a customer with a bad credit score, or least one that is improving. Take important steps to building up your credit score by paying off loans and clearing credit cards and store cards that you are no longer using. Follow these tips for more information on how to improve your credit score.

Can I Ask The Lender For Feedback If I Have Been Declined?

Yes, you can ask the lender for feedback if your loan application has been rejected. Some companies may not be at liberty to say why they have decided not to give you a loan, but some others will and you may find some useful insights. 

Last Updated on May 21, 2024 by Daniel Tannenbaum, Founder of Pheabs

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