If your loan application is denied, you might not know where to turn or what to do next. You can start by finding out why were you denied, how long you need to wait before applying again, and what steps you can you take, right now and in the future, to prevent it from happening again.
This applies to any type of loan you might apply for, including home and auto loans, credit cards, personal loans, and business loans. Whenever there is a disconnect between what you thought was possible and what your lender agrees to, it’s worth narrowing that gap.
Analyze Your Situation
Find out why your loan application was not approved. Lenders are generally glad to give you an explanation and they’re required to provide certain disclosures, so there’s no reason not to find out.
The most common reasons for being denied credit are:
- Bad (or no) credit: Lenders look at your borrowing history, usually in the form of your credit scores, when you apply for a loan. They want to see a solid history of borrowing and repaying loans. However, you might not have borrowed much, or you might have experienced some challenges and actually defaulted on loans in the past.
- If credit was the culprit, your lender is required to provide you with a notice of adverse action, explaining that your credit history was used against you, providing a reason such as defaulted loans or too many inquiries, and explaining certain rights that you have. The notice should explain how you can view your credit reports, often for free. The good news is that you can improve your credit.
- Not enough income: Lenders want to see that you’re able to make the minimum monthly payments before they approve your loan. With some loans, such as home loans, lenders are required by law to calculate your ability to repay.
- Most lenders use a debt to income ratio to see if you can handle the payments upon approval of your loan. They compare how much you earn each month to how much you spend on debt repayment, assuming minimum payments. If it doesn’t look like you’ll be able to afford the new debt, they reject your application.
- Other issues: Occasionally you’ll be declined for other reasons. For example, sometimes mortgage loans don’t go through because an appraisal did not come in high enough to justify the size of the loan.
- When applying for small business loans, lenders often look at the business owner’s personal credit. Unless business owners pledge personal assets as collateral or the business is well-established, the chances of getting approved are slim.
Save yourself some time and frustration before you apply for your next loan. Look at yourself the same way lenders do, check for any red flags in your credit, and see if you truly have sufficient income to repay the loan.
Examine your credit report, and ask lenders if they anticipate any problems. They’ll gladly explain what matters and what doesn’t, and how long you need to wait after certain events like a foreclosure. It’s also worth asking what the lender wants to see for your debt to income ratios.
If you use a small, local institution such as a local credit union, you might be able to speak with a lender directly to learn everything you need to be prepared before you fill out another application.
You can also work through the following steps to clear up your finances and become a better loan candidate.
Some initial steps are important for a healthy financial future, such as:
- Fix errors: If you have errors in your credit report, fix them. You shouldn’t be held responsible for computer errors or somebody else’s actions. You have the right to have mistakes removed. With big purchases like a home purchase, you can get errors fixed and your credit score updated within a few days using rapid rescoring.
- Pay off other debts: Your other loans could be part of the problem. Lenders look at how much you spend on debt repayment each month, so reducing that expense makes you look better as a borrower.
There are also strategies you can use that have an immediate effect on your credit score or may result in being approved for the loan:
- Down payment: A larger down payment for a home or car might help you get approved. You’ll end up borrowing less, which means your monthly payments will be lower. Plus, lenders have less at risk with a lower loan to value ratio, so they might be willing to approve a loan even without perfect credit.
- Use collateral: If you’re applying for a personal or business loan, collateral might help you get approved. Offer to pledge something of value to help secure the loan. Just be aware of the risks: you could lose your home in foreclosure or your vehicle could be repossessed if you fail to make payments. Only take risks that make sense. It’s not worth using a home equity loan to pay for a vacation or a luxury car.
- Get a cosigner: Your income and/or credit were not sufficient to get approved, but you might have better odds if you can add somebody else’s income and credit to the application, assuming they have good credit and decent income. A cosignerapplies with you, and that person will be responsible for repaying the loan. If you fail to repay, the lender will go after both you and your cosigner, and her credit will suffer, so only use a cosigner who is willing and able to understand that risk.
- Apply somewhere else: You’ve been denied, but that’s just one lender’s opinion. It’s valuable information, and you should look at your credit and income, but a different lender might approve your loan. You don’t have to wait before applying again after a rejection, you just have to go somewhere else.
Try a local bank or credit union, and check with online-only lenders. With certain loans such as home and auto loans, in particular, it’s best to “bunch” your applications into a short window of time of 30 to 45 days at the longest to minimize damage to your credit from too many hard inquiries in a short time period.
Unless getting denied was a fluke, you’ll benefit from making some changes so that it’s easier to borrow. The following steps will keep your finances healthy in other ways as well:
- Build your credit: Borrowing will be easier in the future if you build a strong credit history. That means you’ll need to borrow and repay loans on time. Your credit will gradually improve, and you’ll get better interest rates and fewer rejections going forward.
- Get caught up: If you’re behind on any of your loans, it’s time to get things cleaned up so that your credit can begin to heal. That doesn’t necessarily mean paying back 100 percent of what you owe, although that would be the best option. Contact your creditors to work out a payment plan, and get a written agreement to remove negative information from your credit reports.
- Pay down debt: Your existing loans affect your ability to get new loans. Paying off old debt will increase the amount of your monthly income that’s available for newer loans.
- Increase income: Earning more is easier said than done, but it’s worth at least paying attention to your income when you need to borrow money. If you’re looking at any life changes such as quitting a job, it’s best to save those for after you’ve been approved for your loan, and only when you’ve got a plan for paying off the debt.