Regardless of income, more consumers prefer to finance their phones rather than buy them outright [*]. People would rather sign on to a smartphone loan (or payment plan) with a telecom carrier, manufacturer, financing company, or other providers. However, consumers first conduct due diligence before making a purchase.
They ask friends and family, read the latest online reviews, and occasionally interact with the sales store assistant. After collecting information, consumers are excited and ready to complete their purchase.
Unfortunately, things rarely work out as planned. Just like other credit applications such as a mortgage or personal loan, consumers can be rejected for smartphone loans. Buyers find themselves in a frustrating position but can take corrective actions to fix the situation.
3 Reasons for rejecting smartphone loans
1. Poor credit score
A credit score determines a buyer’s ability to repay the loan. The higher the score, the better the chances of smartphone loan approval. However, credit denials are common for individuals who miss or delay their payments or default completely on prior debt obligations.
When they apply for new credit, such as a smartphone loan, they will most likely be denied credit. A poor credit score shows a risk of payment default, and loan providers see smartphone buyers as financially unstable, increasing the chances of rejection.
2. Lack of credit history
There are several reasons consumers may not have a credit history to generate a credit score.
- Young adults have no experience with credit: Young consumers do not have a credit history because they do not have any credit in their name. Since a credit history begins only when a creditor, i.e. the smartphone financier, reports a new account to the credit bureaus. Individuals who can build a good credit history as young consumers will find smartphone loan approvals easier and faster.
- Consumers have applied for a credit for the first time: If buyers are new to credit and just made a purchase on credit, it may take some time to generate a credit score. Since credit score is based on an individual’s experience in making payments, often first-timers may need to make several payments and wait for a period of time before credit bureaus have enough data to establish their credit score.
- Consumers may have never used traditional credit accounts: Some customers prefer to pay cash or debit and do not rely on credit. They find it safer and easier to stay within budget and avoid debt. But with no credit to one’s name, a credit score cannot be generated, as there is no evidence of past behavior to assess creditworthiness.
- No access to regulated financial services: Emerging markets lack the financial access and the underlying financial infrastructure such as savings accounts, debit cards or credit, or digital payments. Therefore, assessing the creditworthiness of an unbanked population is a major challenge.
3. High debt-to-income (DTI) ratio
The debt-to-income ratio is a personal finance measure of an individual’s debt payment to monthly gross income. The DTI ratio is one of the metrics used by loan providers to measure an individual’s ability to repay debts.
A DTI ratio indicates an individual has too much debt for the amount of income earned. According to loan providers, individuals with a high DTI ratio are unlikely to manage their monthly debt payments effectively.
As a result, financing companies, telecom carriers, and OEMs want to see low DTI ratios before issuing smartphones to potential customers.
Boosting chances of smartphone loan approval
Denial to smartphone loans can occur for other reasons, such as incorrect information in the consumer’s credit report. Submitting incomplete documents can also be a reason to reject a loan request.
But a loan denial isn’t a be-all-end-all situation. Fortunately, there are other options available for customers to get a new smartphone or upgrade.
1. Smartphone financing with remote locking technology
Smartphone financing allows consumers to make payments over time. Customers choose the mobile phone they would like to purchase and apply for financing. But these loan providers risk financing unsecured smartphones.
Nuovopay’s smartphone financing enablement allows financing companies, telecom carriers, and manufacturers to de-risk smartphones offered on loans. The technology reminds customers to make payments on time and remotely locks in the event of a payment default.
Although signing up for a smartphone with remote locking technology may seem extreme. It not only assures loan providers timely revenue but significantly improves customer chances of owning a smartphone, irrespective of credit score or lack of credit history.
2. Improve credit score
This option is a no-brainer. To increase one’s chances of being accepted for a smartphone loan or any form of credit in the future, individuals should try to improve their credit score by:
- Making monthly repayments on time
- Sticking to the credit limits on any cards
- Checking credit reports to check and fix errors
Be patient. Do not reapply repeatedly – applications reflect on the credit reports. Frequent applications suggest desperation for credit.
3. Pay a deposit
Obtaining a phone from a telecom carrier may be possible despite poor credit history. By paying an upfront deposit for the contract, telecom providers can offset the risk in case customers fail to make payments.
The amount of deposit depends on the credit score, type of plan, and the telecom carrier. Customers receive the deposit back after several months of payment or at the end of the tenure. Some telecom companies also offer deposit alternatives.
For example, T-Mobile’s Smartphone Equality Program enables customers to obtain new smartphones with zero down payments and no credit checks. To qualify for the program, customers must make 12 consecutive payments on time on their existing plan.
Good credit certainly helps with obtaining a smartphone loan. Establishing good credit habits is crucial, so buyers can build an excellent credit history and credit score. To avoid loan denial, especially for customers with no credit history, smartphone financing enablement is a feasible solution.