What to Do If Your Loan Application Is Rejected

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.

Before Re-Applying

Save yourself some time and frustration before you apply for your next loan. Look at yourself the same way lenders do, and 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 you 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.

You can also work through the following steps to clear up your finances and become a better loan candidate.

Quick Clean-Ups 

Some errors are most easy to fix than others, 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.
  • 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.



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