Rejection in any form is likely to leave a bad taste in your mouth. It’s easy to see rejection as failure and it can be tempting to give up. However, when it comes to financial matters, that is usually not an option. Being rejected for a loan is not a failure, as many people have their loan denied for a wide variety of reasons. Much like any other kind of setback in life, how you choose to move forward says more about you than the rejection.
To help you recoup and set yourself up for success the next time you apply for a loan, we’ll explain some of the possible reasons you may have been rejected and what steps you can take to prevent that from happening again.
Get the Facts
The first step is to find out why your loan application was not approved. Lenders are legally required to provide applicants with a written explanation with the specific reason the loan was denied. Some lenders will include this with the rejection letter, but if they don’t, you have 60 days to request it.
The law, known as the Equal Credit Opportunity Act, mandates that all lenders and credit providers tell you the specific reasons you were denied. You’ll want to find the “red flags” that caused them to reject your loan.
Common Reasons Loans Are Rejected
Bad Credit Score: The purpose of a credit score is to inform lenders how likely you are to pay back a loan. A low credit score tells a lender that if they loan money to you, they are less likely to get that money back.
There’s an Error on Your Credit Report: Sometimes you are denied a loan because of an error on your credit report. Errors are not an uncommon occurrence in credit reports. In 2012, the Federal Trade Commission reported finding that one in five consumers had an error on their credit report. There are number of errors that can damage your credit score, including:
- A name mix up – if you have a common name, your file may contain credit information from someone with the same name
- Identity theft – victims of identity theft will have errors that don’t belong on their report
- Outdated information – an account may still be on your report after the legal deadline to remove it
- Remedied delinquencies not reported as such – if your remedied delinquency is not reported it will negatively impact your score
Your Credit History is Short: A short credit history means that a lender has less information to demonstrate how likely you are to pay them back. If you’re applying for a loan that will be paid back in five years’ time, but only have one year’s worth of credit history, it can be hard to predict how likely you are to pay back the loan over that time.
Not Enough Income: Lenders want to see that you will be able to make the required monthly payment. They may use the debt-to-income ratio to predict how well you’d be able to handle repayment.
Too Much Debt: If you are carrying a lot of debt, a lender will likely be concerned that you will not be able to make the payments on a new loan.
Loan Denied? Next Step Solutions
It is possible to move on from a loan rejection and successfully reapply. There are short-term solutions that can help you get the loan you need in a more timely manner. There are also long term solutions you can take that will help secure your ability to successfully apply for a loan in the future.
Fix Credit Score Errors: Once you’ve checked your credit score, it is important to report any discovered errors immediately. This is a great way to quickly improve your score. Remember to continue to regularly check your score to prevent errors from happening again.
Larger Down Payment: If your loan requires a down payment, a larger one can help you get approved. You’ll be borrowing less and making smaller monthly payments which might make a lender more willing to offer you the loan.
Pay Off Other Debts: Outstanding debt is a big “red flag” for lenders and you should try to have other debt paid off before applying for more.
Use Collateral: To help assure the lender that they won’t be left in the lurch if you can’t make your loan payments, you may want to offer up collateral. Collateral is something of value that you agree you agree to turn over to the lender if you can’t make payments. Collateral can be a home, a car, or other items of larger value.
Get a Cosigner: A cosigner is someone you know and trust who will be legally responsible to pay back a debt if the borrower can’t pay. This option should be reserved for people who were rejected due to their short credit history. If a borrower was rejected because of their bad credit, this option can be risky for the cosigner and may still be rejected by the lender.
Long Term Solutions
Build Your Credit: Improving your credit score is vital to being approved for a loan and getting a decent rate when you do. There are a number of ways to improve your score, including: making payments on time, keeping your credit utilization ratio under 30%, and keeping your spending under control.
Want to learn more about how to rehabilitate your credit score? Check out our article about how debt impacts your credit score.
Pay Down Debt: For most people, paying down debt doesn’t happen right away. Make a strategic effort to pay down debt, especially debt with a higher interest rate. Consult your bank about debt consolidation to find out if that is viable option for getting your debt under control.
Increase Income: This option is easier said than done, but increasing your income can be a great way to make you more likely to receive a loan. If possible, ask for an increase at your next performance review or find a higher-paying job.
Find a Part-Time Job: Having a part-time job or doing free-lance work can help increase your income so you can get your debt under control. Once your debt has been paid down with this additional income, you can decide if continuing to work at the part-time job is the right decision for you.
Reapplying for a Loan
Being rejected for a loan doesn’t mean you’ll suddenly stop needing a loan. After finding out what went wrong and beginning to enact some of the solutions available to you, the next step should be talking to a qualified lender. It’s possible that there are loan options available to you that would make more sense and make you more likely to be approved.
Discuss your payment goals with the lender so they can help you structure a loan with a repayment plan that makes sense for you.
Consult an Expert
Need help from an expert? The Trusted Advisors at Union Community Bank will work with you to go over your credit score and help you create a successful financial plan. Contact us to schedule an appointment or visit one of our 14 convenient locations today.