6 Things To Do When You're Turned Down For a Loan

There are many expenses that we can’t always afford out of pocket. Cars, new homes, and personal emergencies typically require more money than we have available. In these situations, we often turn to loans to be able to afford these necessary expenses. These loans can be anything from personal loans, mortgages, or credit cards. But what do you do if your loan application is denied?  

First, you need to understand why your application was denied. It could be because you have a poor credit score or because you asked for more money than the lender thought you’d be able to afford. Either way, you’ll have to figure out why you weren’t approved, then work to improve your circumstances to avoid being denied in the future. 

Common reasons why a loan may be denied 

When a person applies for a loan, their financial information is reviewed by the lender in order to determine whether they have the ability to repay the loan. When it comes to financial decisions, there are a number of reasons why a loan application may be denied. Here are some of the most common: 

  • Credit: Your credit history and credit score are usually checked when you apply for a loan. This information shows your borrowing history, as well as how well you’ve handled past credit. Lenders want to see that you’re creditworthy—you’ve borrowed and successfully paid off accounts before. If your credit is bad, it shows lenders that you haven’t been able to responsibly handle past credit, making them less inclined to give you a new loan. 

  • Income: Lenders also look at your income when you apply for a loan. This is because they want to make sure that you make enough money to be able to pay the loan back on time. If you’re denied a loan based on your income, it can mean that you asked for more than the lender thought you’d be able to afford, or that you don’t make enough to qualify for the loan you’ve applied for. If your income is low, some lenders may not see you as a viable borrower. 

  • Debt-to-income ratio: Your debt-to-income ratio compares your monthly income with how much of this income is spent on debt repayment. If a large portion of your income is spent on paying back debts, lenders may believe that you already have too many debts (and, consequently, will be less likely to pay them all back), which can lead them to deny your loan application. 

The best way to determine the reason why your loan was denied is to take a look at your adverse action notice. This notice is to inform you that you have been denied credit, employment, insurance, or other benefits based on information in a credit report. The notice should indicate which credit reporting agency was used, and how to contact them. This document can be incredibly useful, as it can help you identify what you need to fix before you reapply. 

Strategies to strengthen your application 

Once you understand why your loan was denied, you can work toward fixing those aspects of your financial history. Some changes will take more time than others, but moves in the right direction can help reduce your overall chances of being denied. Here are some quick tips: 

Short-term strategies 

  1. Look over your credit report: Your credit report is a detailed report of your credit activity and credit history. It shows past accounts that you have taken out and your progress on paying them back. Take a careful look over your credit report and check that everything is correct, as it’s possible for there to be inaccurate information. If you spot any errors, dispute these inaccuracies. Fixing erroneous information can help increase your chances that you’ll be approved for loans in the future. 

  1. Use collateral or a cosigner: Lenders want to be confident that you’ll be able to pay their loans back. In some cases, your financial information alone is not enough to reassure them. You can back up your loan with collateral (a high-value asset, such as a car), which the lender can seize if you default on the loan. You can also have a cosigner, who will typically need to have better credit, a higher salary and savings, and/or a longer credit history than you do. By signing onto your loan, a cosigner promises to pay it off on your behalf if you aren’t able to. 

  1. Increase your down payment: Certain loans, such as car loans or mortgages, require making an initial down payment before taking out a loan to pay for the remaining balance over time. Making a higher down payment means you won’t have to borrow as much. This also means lower monthly interest and less stress on your income. Lenders will see that less of your income will have to go toward debt, making you a more viable borrower. 

Long-term strategies 

  1. Improve your credit score: Having a bad credit score positions you as a risky borrower, making lenders less likely to approve you for loans. You can work to increase your credit score by improving your debt-to-income ratio, your credit utilization ratio, and other factors that affect how your credit score is calculated

  1. Pay off existing debts: Having a high amount of outstanding debt makes lenders wary of your ability to pay off even more, making them less likely to approve you for new loans. Repaying your existing debts shows lenders that you are trustworthy and can afford to take out new loans, increasing your chances of being approved. 

  1. Create a budget: When you come up with a budget, you account for all of your income and decide how much to spend on particular categories. You can use your budget to determine how much you can afford to increase your debt payment and savings, which can lead to a better credit score. This will show lenders that you can handle past debts and make them more likely to approve you for new loans in the future.  

When it’s time to reapply 

  1. It’s easy to feel defeated after being denied a loan. However, it’s important not to give up. Once you’ve bolstered your application and fixed the problems that led to your denial, wait a little while and apply again. Knowing that you’ve improved your credit, you can be confident that you’ll be a stronger candidate with a better likelihood of approval. But remember, don’t borrow more than you need. Just because you can get a loan doesn’t mean you should take it. Overextending yourself could be what got you into your current financial situation. Evaluate all of your options before you decide to reapply.  

Disclaimer: The material presented here is for informational purposes only and does not represent specific financial advice to you or your circumstances personally.
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