It can be a huge blow to your finances if your loan application gets rejected, especially if you were counting on that money already. You might have to put major financial moves on hold — delaying buying a home,buying a car, even enrolling in college, until you can secure the financing.
But all is not lost, even if you get a no. You might still have options to get a loan now. And even if not, you can take steps to ensure your application is better the next time around.
What to Do if a Lender Rejects Your Loan Application
If your lender declined your loan application, take the following steps to improve your application or find a lender that works better for your needs.
1. Identify the Reason for the Loan Denial
If you get denied for a loan, whether it be a personal loan, home equity loan, student loan, or auto loan, your lender should tell you why. You should get an email or letter explaining why you were denied and who you can contact if you have any questions.
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Lenders deny loan applications for many reasons. These are the most common.
Poor Credit History
Most lenders will run your credit when you apply for a loan. That’s because your credit score is a clear indicator of your financial history. A lower credit score could mean you may not have been able to pay back loans in the past, or you’ve mismanaged your money in some way.
Remember, lenders base their decisions entirely on the risk to them. If they get a sense you won’t pay them back, you’re less likely to get approved.
Lack of Necessary Income
Having a low income doesn’t necessarily disqualify you from getting a loan, but you’ll probably have to settle for a smaller loan than you’d like.
That’s because the ratio between your income and your total monthly payments on loans — your debt-to-income ratio (DTI) — needs to be at a level acceptable to the lender. That’s usually between 30% and 45%, depending on the lender and the loan type. And, yes, “loans” here includes the one you’re applying for.
Lenders understand that you have more expenses in your life than just their loan. So if your income is enough to support yourself but you don’t have much left over at the end of the month, underwriting a large loan is a risk they won’t be willing to take.
Insufficient Employment History
Many loans require that you have an income you can prove so lenders know you can pay back your loan. If you don’t have a long employment history, you might not be able to get the loan you want.
2. Review Your Credit Report
Having a low credit score is a more common reason for application denial, so working on upping your score is one of the best ways to ensure you get an approval next time. You can secure one free credit report each year through annualcreditreport.com, or you can use a free site like Credit Karma or Credit Sesame, both of which can give you suggestions on how to improve your score.
Once you have your report, you’ll want to check for any errors. Credit report errors are surprisingly common, with over a third of Americans reporting mistakes. To dispute an error on your credit report, get in contact with the different credit bureaus. Use the respective dispute pages for Equifax, Experian, and TransUnion.
3. Boost Your Credit Score
Once you’ve taken a look at your credit score, it’s time to figure out where the issue is.
Do you have a high amount of debt already, which affects your all-important credit utilization ratio? Work on paying it down quickly if you can.
Have you opened too many accounts recently? Unfortunately, you simply might need to wait a bit for one of the inquiries to drop off your report.
Haven’t built up enough credit yet? Consider a credit builder loan or secured credit card first.
4. Pay Down Debt
We’ve already seen how lenders are reluctant to lend to people with high DTI ratios. So to make yourself more attractive to potential lenders, pay down some of the debt you already have.
Obviously, this is easier said than done, but there’s no use putting yourself into more debt. Here are a few ways you can start attacking your debt:
- Consider a Balance Transfer Credit Card. While you’ll need decent credit for this option, the best balance transfer credit cards have 0% APY introductory periods stretching for more than 12 months. That gives you time to pay off the transferred balance without paying any interest.
- Negotiate Your Debt. Some lenders allow you to negotiate your debt balances or payments. They know that if they don’t come to some sort of agreement, you may not pay them at all. By negotiating, they get at least some of what they owe. There’s no harm in asking — the worst a lender can do is say no.
- Try the Debt Snowball or Avalanche Method. These two debt payoff methods help you stay motivated when making your monthly debt payments. The snowball method finds you paying your smallest debt first and working your way up. The avalanche method finds you paying the largest interest loan first.
5. Increase Your Income
Insufficient income is another common reason your application may be denied. Lenders need to know that you have the means to pay back the loan.
For example, if you make $35,000 and are trying to take out a $30,000 personal loan or private student loan, your lender might be concerned that you’ll put too much of your loan’s proceeds toward basic living expenses, leaving nothing for repayments.
Increasing your income isn’t an easy task, but it can be done over time. Getting a side hustle is one of the best ways to grow your income. From ridesharing to blogging to landscaping to selling your unwanted items, there’s an endless amount of side hustle options.
6. Consider Other Ways To Get a Loan
While you’re working on the steps above, you can look for other ways to get a loan sooner rather than later. Try these options.
Apply With Other Lenders
Even if your first choice lender doesn’t accept your application, they are far from the only option, even if you have bad credit. Chances are good — though not assured — that you’ll find a different lender willing to underwrite your new loan.
For example, consider working with a local bank or credit union. These lending institutions tend to be more lenient since they have a personal relationship with bankers and you can talk with a real person and plead your case.
Or, work with an online lender that lets you prequalify. Getting a pre-approval only requires a soft credit check, so your score won’t be affected. This can help you understand if you’ll qualify before you go through the whole application process.
Finally, even if your loan application is repeatedly deny, never turn to payday loan lenders. Most applicants get approved by payday lenders, but that’s only because their terms and conditions are so terrible that there isn’t a ton of risk for them. You’ll pay interest rates over 100% and only have until your next payday to pay back the loan.
Apply for a Secured Loan
Secured loans involve you putting up some sort of collateral to secure the loan. For example, any home equity loan you take out will be secured by your home. In the event that you don’t pay your debt back, the lender could seize your home. These loans may not require as high of a credit score since the lender has a valuable asset to back up the loan.
Get a Cosigner
A cosigner is a person, presumably with better credit than you, who is willing to sign onto the loan with you. The lender will consider their credit when making a decision on your application, so you’ll have a better chance of qualifying.
Just be aware in the event that you can’t make your loan payments, your cosigner will be on the hook. This can lead to problems within the relationship if this burden gets shifted to them — and can affect their credit if late payments end up on their credit report. So make sure you can pay the loan back on time before asking a family member or trusted friend to cosign.
Make a Larger Down Payment
If, for example, you’re applying for a mortgage loan and you fall just short of a good credit score, making a large down payment can help your potential to get approved. You’re lessening the risk for the lender by reducing the overall loan amount, so they may be more willing to approve your home loan.
Borrow From Family
While you need to tread lightly, if you feel comfortable asking your family for help, this could be a good option. Chances are, you’ll have some leeway when it comes to the payback timeline and you may not have to pay interest. That’s better than you’ll do with a private lender.
Getting your loan application rejected can feel like the end of the world, but there are moves you can make that can help you still get the funding you need. Start by understanding why your application was denied and take the necessary steps to resolve that issue.
Depending on the type of loan you applied for, it could simply be that you didn’t qualify for that one specific lender. Other lenders may have more lenient requirements in exchange for a slightly higher interest rate.
Do your due diligence and prequalify with a few other lenders if you can. That way, you’ll have a good sense of whether your application will be accepted before going through the entire underwriting process.