Loan Application Denied?

Missing Piece
Is there a missing piece that can help you get approved?. alashi / Getty Images

If your loan application is denied, you might wonder what to do next. Why were you denied, how long do you need to wait before applying again, and what steps can you take to prevent it from happening again? It’s important to understand exactly what happened because it will probably continue to happen if you don’t take action (plus it’s a warning sign that something might be wrong).

This applies to pretty much any type of loan that you 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.

Understand the Problem

The first step is to find out why your loan application was not approved. Lenders are generally glad to give you a reason, and they’re required to provide certain disclosures in some cases – so there’s no reason not to find out.

The most common reasons for being denied credit are:

  1. Problems with your credit
  2. Not enough income

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 that you have 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. Either way, it’s harder to borrow without good credit.

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 see your credit reports, often for free. The good news is that you can improve your credit (see below).

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 how well you’ll handle the payments if they approve 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, but credit and income are the biggies. 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.

Quick Fixes

Now that you know what’s wrong, you’d probably like to find a solution – fast. Some problems can be dealt with quickly, but others will take time. A few potential short-term solutions are listed below.

Fix errors: if there are 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. With big purchases like a home purchase, you can get errors fixed and your credit score updated within a few days using rapid rescoring.

Down payment: a larger down payment might help you get approved.  You’ll end up borrowing less, which means your monthly payments will be lower. Plus, lenders have less at risk with a lower loan to value ratio – so they might be willing to approve a loan even without perfect credit.

Pay off other debts: your other loans could be part of the problem. Again, lenders look at how much you spend on debt repayment, so reducing that expense will make you look better as a borrower. Of course, if you had extra money you might not need the loan (or you’d use it to make a larger down payment).

Use collateral: if you’re applying for a personal or business loan, collateral might help you get approved (but if you’re applying for a home or auto loan, whatever you’re buying is probably serving as collateral already).

Offer to pledge something of value to help secure the loan. Just be aware of the risks: you could lose your home in foreclosure or your vehicle could be repossessed if you fail to make payments. Only take risks that make sense (it’s not worth using a home equity loan to pay for a vacation or luxury car).

Get a cosigner: your income and/or credit were not sufficient to get approved, but you might have better odds if you can add somebody else’s income and credit to the application (assuming they have good credit and decent income). A cosigner applies with you, and that person will – just like you – be responsible for repaying the loan. If you fail to repay, the lender will go after you and your cosigner, and her credit will suffer – so only use a cosigner who is willing and able to understand (and take) that risk.

Apply somewhere else (right away, if you like): you’ve been denied, but that’s just one lender’s opinion. It’s valuable information, and you should look at your credit and income, but a different lender might approve your loan. You don’t have to wait before applying again after a rejection – you just have to go somewhere else. Try a local bank or credit union, and check with online-only lenders. With certain loans (home and auto loans in particular) it’s best to “bunch” your applications into a short window of time – 30 to 45 days at the longest – to minimize damage to your credit. Just be sure not to get desperate and turn to predatory lenders like payday loan shops – it’s not worth it.

Long Term Solutions

Unless getting denied was a fluke, you’ll need to make some changes so that it’s easier to borrow. The following steps will keep your finances healthy in other ways as well.

Build your credit: borrowing will be easier in the future if you build a strong credit history. That means you’ll need to borrow (when it makes sense) and repay loans on time. Your credit will gradually improve, and you’ll get better interest rates – and fewer rejections – going forward. Learn how to build your credit.

Get caught up: if you’re behind on any of your loans, it’s time to get things cleaned up so that your credit can begin to heal. That doesn’t necessarily mean paying back 100% of what you owe, although that would be the best option. Contact your creditors and try to work out a payment plan, and get written agreement to remove negative information from your credit reports.

Pay down debt: remember that your existing loans affect your ability to get new loans. Paying off old debt will increase the amount of your monthly income that’s available for newer loans.

Increase income: earning more is easier said than done, but it’s worth at least paying attention to your income when you need to borrow money. If you’re looking at any life changes (such as quitting a job), it’s best to save those for after you’ve been approved for you loan – and only when you’ve got a plan for paying off the debt. If you know you’ve got an important purchase coming up, take on extra work (at least for long enough to boost your income).

Before you Re-Apply

Save yourself some time and frustration before you apply for your next loan. Look at yourself the same way lenders do: are there any red flags in your credit, and do you have sufficient income to repay the loan?

Go through your credit report, and feel free to ask lenders if anything is going to be a problem – it’s going to come up anyway if you apply for a loan. They’ll gladly explain what matters and what doesn’t, and how long you need to wait after certain events like foreclosure. It’s also worth asking what the lender wants to see for your debt to income ratios.

If you use a small, local institution (like a small credit union), you might be able to speak with a lender one-on-one to learn everything you need before you go to the trouble of filling out an application.