When your loan application is denied, you might feel clueless about your next move. Don’t give up hope and take a step back. Look out for reasons and find out why your application was denied.
Remember you are not the only person who got a loan application denied. In some countries, about 70% of all loan application are declined for one reason or the other. This can happen with all types of loans, be it personal, house or business loans.
Analyze Your Situation
Analyze the reasons for your rejection. Most common ones are:
1. Bad (or no) credit history
2. Not enough income
3. Other issues
Bad (or no) Credit History: Lenders want to see a solid credit history. It usually doesn’t depend on the amount you borrowed but how well you were able to repay the last borrowed amount.
If you have a low credit score, you’ll be provided with a notice of adverse action that explains your defaulted payments in detail. You can improve your credit score in the future by paying your loans on time and looking for flaws in the report.
Not Enough Income: Lenders want to be sure that your current income is sufficient enough to pay back their loan payments. Debt to income ratio can be used to calculate your ability to repay the loan. If it looks like your income can’t support your payments, they may reject the application.
Other issues: Loans can be denied if a strong reference wasn’t provided. In addition to this, a lack of collateral can also be a reason for an application to get declined. You should look for unsecured loans if you do not have collateral to submit so that the risk factor is reduced.
What to Do Before You Re-apply For a Loan
Examine your credit history and see if you have sufficient income to repay the loan by calculating your debt to income ratio.
Institutions like your Local Credit Union can help you talk to a lender directly and get prepared before you fill out a new application.
Some small changes can improve your chances of securing a loan. Here’s what to do:
Fix Errors: Fix all errors in your credit report and get your credit score updated by using rapid rescoring. This may take a while as you will need the help of professionals. You cannot make changes to your credit report, only those authorized can do so. Hence, stay calm.
Pay off Your Debt: Pay back all the debt and have a clear record. Most lenders will reject your loan application if you are already under a lot of debt.
Down Payment: A huge down payment, if possible, can make you look better as a borrower. However, not all lenders may offer this feature.
Use Collateral: Collateral means pledging something of value to secure the loan.
Get a Co-signer: Pool in someone else’s income in your profile, for example, a spouse’s or a parent’s. A co-signer applies with you and they are also responsible for the repayment of your loan.
Apply Somewhere Else: When one door closes, many others are still open. You can apply somewhere else after improving your credit history and income.
The following steps will keep your finances strong in the long-run.
Build Your Credit: It is possible to improve your credit score. Pay your loans on time and do not apply for loans when you don’t need money.
Get Caught Up: If you are behind on your loans, it’s better to make some down payments in order to make your statements look healthy. Restart your payment plans and try to get negative comments removed from your credit report.
Pay Down Debt: Get rid of old debt in order to be able to get new loans.
Increase income: Try to look for other means to increase your current income by getting some part-time jobs.