what to do if the lender rejects your loan application It can be a huge blow to your finances if your loan application is denied, especially if you are already dependent on that money. You may have to put big financial moves on hold — such as delaying buying a home, buying a car, or even enrolling in college until you can secure financing.
But all is not lost, even if you get a “no”. You may still have options for getting a loan now. And even if that’s not the case, you can take steps to make sure your order is even better next time.
What to do if the lender rejects your loan application
If a lender declines your loan application, follow these steps to improve your application or find a lender that works best for your needs.
1. Determine the reason for the loan rejection
If you are denied a loan, whether it is a personal loan, home equity loan, student loan, or car loan, the lender must tell you why. You should receive an email or letter explaining why you were refused and who you can contact if you have any questions.
Lenders reject loan applications for many reasons. These are the most common.
Poor credit history
Most lenders will manage your credit when you apply for a loan. That’s because your credit score is a clear indicator of your financial history. A low credit score could mean that you may not have been able to pay off loans in the past, or that you have mismanaged your money in some way.
Remember that lenders base their decisions entirely on the risks they are exposed to. If they feel you won’t respond to them, you are less likely to get approved.
Lack of necessary income
Having a low income does not necessarily disqualify you from obtaining a loan, but it is likely that you will have to settle for a smaller loan than you would like.
This is because the ratio between your income and your total monthly loan payments – the debt-to-income ratio (DTI) – must be at a level acceptable to the lender. This is usually between 30% and 45%, depending on the lender and the type of loan. And yes, “Loans” here includes the loan 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 at the end of the month, taking out a large loan is a risk they will not be willing to take.
Insufficient employment history
Many loans require that you have income that you can prove so that lenders know you can pay off your loan. If you don’t have a long employment history, you may 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 an application to be rejected, so working to increase your score is one of the best ways to ensure that you get approved 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 will need to check for any errors. Credit reporting errors are surprisingly common, with more than a third of Americans reporting the errors. To dispute an error on your credit report, contact the various credit bureaus. Use the Equifax, Experian, and TransUnion dispute pages.
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3. Increase your credit score
Once you take a look at your credit score, it’s time to figure out where the problem is.
Do you already have a large amount of debt, which affects your critical credit utilization ratio? Work to pay it off quickly if you can.
Have you opened too many accounts lately? Unfortunately, you may simply need to wait a bit for a query to drop your report.
Haven’t earned enough credit yet? Consider a credit originator loan or secured credit card first.
4. Pay off debts
We have already seen how lenders are reluctant to lend to people with high DTI ratios. In order to make yourself more attractive to potential lenders, pay off some of the debts you already have.
This is obviously easier said than done, but there’s no point in putting yourself in more debt. Here are some ways you can start attacking your debt:
Consider a balance transfer credit card. Although you will need decent credit for this option, the best balance transfer credit cards have 0% APY introductory periods of more than 12 months. This gives you time to pay off the transferred balance without paying any interest.
Negotiate your debt. Some lenders allow you to negotiate the balances of your debts or payments. They know that if they don’t come to some kind of agreement, you might not pay them at all. Through negotiation, they get at least some of what they owe. There is no harm in asking – the worst thing a lender can do is say no.
Try the Debt Snowball or Avalanche method. These two ways to pay off debt help you stay motivated when making your monthly debt payments. The snowball method finds you to pay off your small debts first and then work to increase your level. The avalanche method finds that you pay the largest interest loan first.
5. Increase your income
Insufficient income is another common reason your application may be rejected. Lenders need to know that you have the means to repay the loan.
For example, if you take out $35,000 and are trying to get a $30,000 personal loan or a private student loan, the lender may be worried that you will allocate too much of your loan proceeds to cover basic living expenses, leaving nothing to pay off.
Increasing your income is not an easy task, but it can be done over time. Having a side business is one of the best ways to increase your income. From sharing trips to blogging to landscaping to selling unwanted items, there are an endless number of side hustle options.
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6. Consider other ways to get a loan
While working on the above steps, you can look for other ways to get a loan sooner rather than later. Try these options.
Apply with other lenders even
if the lender you choose does not accept your application, it is far from the only option, even if you have bad credit. Chances are good – albeit not certain – that you will 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 because they have a personal relationship with the bankers and you can talk to a real person and plead your case.
Or work with an online lender that allows you to pre-qualify. Getting pre-approved only requires a flexible credit check, so your score isn’t affected. This can help you understand if you will qualify before you go through the entire application process.
Finally, even if your loan application is repeatedly denied, never turn to payday loan lenders. Most applicants are approved by payday lenders, but that is only because their terms and conditions are so poor that there is not much risk for them. You will pay interest rates of over 100% and you only have until the next payday to pay off the loan.
Apply for a secured loan
Secured loans involve providing some type of collateral to secure the loan. For example, any home purchase loan you take out will be secured by your home. In the event that your debts are not paid, the lender can take over your home. These loans may not require a high credit score because the lender has valuable assets to back the loan.
Get a cosigner
A cosigner is someone who, presumably, has better credit than you, and is willing to sign the loan with you. The lender will consider their credit when deciding on your application, so you will have a better chance of qualifying.
Just be aware in case you are unable to make the loan payments, your cosigner will be in trouble. This can lead to problems within the relationship if this burden is transferred to them – and it can affect their credit if payments end up late on their credit report. So make sure you can pay off the loan on time before asking a trusted family member or friend to sign.
Make a bigger down payment
For example, if you’re applying for a mortgage loan and don’t achieve a good credit score, making a large down payment can help get approved. You reduce the risk for the lender by reducing the total loan amount, so they may be more willing to approve your home loan.
borrowing from family
While you need to walk gently, if you feel comfortable asking your family for help, this may be a good option. You will likely have some freedom when it comes to your redemption schedule and may not have to pay interest. This is better than what you would do with a private lender. what to do if the lender rejects your loan application
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