What to do if your loan application is rejected?

Lenders reject a personal loan application mainly due to poor credit scores, high Debt-to-Income ratio (DTI), inaccurate or, incomplete documents, and inadequate income proof.

Here are several steps that an applicant can consider in case of any loan denial:

• Understand the main reason for loan rejection
• If your credit score is poor, take time and build your credit score
• Ensure that your DTI is not too high
• Address the inaccuracy within the loan application (if there was any)
• Improve your financial profile by paying earlier debts or increasing income
• Try other lenders such as credit unions, online lenders, or Peer to Peer lending groups
• Introduce a co-signer
• Consider taking a secured loan if you have assets to pledge as security
• Seek professional advice and reapply later

Why does a loan application get denied?

A loan application can be denied for various reasons such as low credit score, high DTI, insufficient income, unacceptable loan purpose, poor banking history, and not meeting the lenders’ criteria.

Here we gathered all of the possible reasons behind the loan denial:

• Poor credit score due to late payments, defaults, or bankruptcies.
• A Limited credit history makes it difficult for lenders to assess your creditworthiness.
• High Debt to Income ratio due to significant outstanding debts.
• Insufficient income relative to your debt obligations can lead to rejection.
• Unstable income due to frequent job changes and gaps within the employment period.
• Failing to provide required documents while applying.
• Mistakes in your application, such as incorrect personal details or financial information.
• The purpose of the loan was unjustified in the loan application.
• Previous history of high credit card balances.
• Multiple hard credit inquiries within the loan application processing time.
• Previous history of overdraft, late payment, or bounced cheques.
• Pending lawsuits or legal judgments on the applicants.

If you have already faced a loan rejection, try finding the main denial reasons from the above list.

If you have already addressed the reasons, below is our expert guide that will help you to reapply for a personal loan with a better possibility of getting one.

What to do if your loan is denied?

In short, you need to work on improving your credit score and other factors to reapply for another loan.

In this part, we will address your probable action more broadly.

Understand the reason for loan rejection

Your first job is to address the reasons that caused you a loan denial. This will help you troubleshoot the main reasons and save time and effort on future applications.

You can start by getting a copy of your credit report from the major credit bureaus (Experian, Equifax, and TransUnion).

Review your credit report for any errors or inaccuracies that might have negatively impacted your score. Common errors include incorrect personal information, duplicate accounts, or fraudulent activity can lower your credit performance over time.

Learn what is a good credit score and the credit agencies assess your performance. Once you are familiar with the terminologies, this is the time to work on your payment history, credit mix, and credit utilization.

Here’s a quick take on how would you rebuild your credit score:

• Pay your bills on time
• Reduce your debt
• Keep credit card balance low
• Do not open new accounts
• Diversify your credit mix (credit cards, installment loans, mortgages) responsibly.
• Ask a family member or friend with a good credit history to add you as an authorized user on their credit card.
• Consider a credit builder loan
• Limit hard enquiries by reducing your number of loan applications

Moreover, you need to improve your Debt to Income ratio (DTI) to an acceptable range. A DTI of 30% represents that an applicant uses his 30% of income to repay existing debts. Lenders do not usually accept loan applications having 40% or more DTI.

We suggest you target keeping your DTI below 36% with no more than 28% of that going toward housing expenses.

Furthermore, if you have provided any incomplete information you need to rectify that reason by reviewing the lender’s application checklist. Double-check the information you submitted for accuracy. Errors in your personal details, employment history, or financial information can result in your application being denied.

If your denial reason was the lack of stable employment history, ensure that your income documentation (pay stubs, tax returns, bank statements) is thorough and up-to-date. If you are a freelance worker or a seasonal worker, try building your income history for more than 6 months with consistent income and reapply.

Some lenders have restrictions on the use of loan funds. Ensure that your intended use of the loan aligns with the lender’s policies and you have provided sufficient documents/information that justifies the reason for your loan.

Make sure you meet all regulatory requirements. For instance, anti-money laundering laws require lenders to verify your identity and the source of your funds.

Are you considering other lenders?

If a bank has already denied your loan application, exploring other lenders such as credit unions, online lenders and Peer-to-peer financing platforms can be a good idea if you are in urgency. However, hard inquiries from multiple lenders will have a negative impact on your credit report.

Credit unions provide more personalized service to applicants with less-than-perfect credit. They tend to offer lower interest rates and fees compared to traditional banks.

However, many credit unions have membership requirements based on factors like where you live, your employer, or your membership in a particular organization. And, there can be limited availability of the borrowing amount since such organizations are member-owned. Also, credit unions do not offer large credit amounts compared to traditional banks.

You may explore online lenders and peer-to-peer lending platforms as an alternative source of borrowing.

Such application process is typically quick and requires less due diligence compared to banks. However, online lenders and other P2P platforms will charge higher interest rates due to your poor credit score and will offer limited amounts and less flexible credit terms that can further threaten your credit performance in the future.

If you are an employed person with a bad credit score, you can apply for a loan from your employer that does not require so many documents as the banks.

A loan from an employer does not affect your credit report and you can negotiate flexible loan terms with your employer.

If you are considering other lenders, here’s a quick guide for you:

• Compare interest rates, fees, and terms from multiple lenders to find the best option for your needs.
• Ensure you meet the basic eligibility criteria before applying to avoid unnecessary hard inquiries on your credit report.
• Look up reviews and ratings of lenders to gauge their reputation and customer service quality.
• Carefully read and understand the loan terms, including the repayment schedule, interest rates, fees, and any potential penalties.
• Gather all necessary documentation, such as proof of income, employment verification, and financial statements, to streamline the application process.

Apply with a co-signer

Applying with a co-signer will significantly boost your likelihood of getting a personal loan.

Bringing a co-signer represents that someone from your friends or family agrees to bear the risk on behalf of you the lender.

Importantly, bringing a co-signer with a good credit score can only help you since the lender will perform hard inquiries for the co-signers too.

But, how does the co-signer vary from the co-borrower?

In simple sentences, a co-borrower can access the borrowed fund and a co-signer cannot. In both cases, a credit report with a good score is a must.

Bringing a co-signer is not so easy.

If you have already faced loan rejection, your co-signer needs to be aware of your future economic assurance.

In most cases, only the close family members agree to be your co-signer.

Consider a secured loan if your earlier loan application is denied

A secured loan represents that a borrower is ready to pledge an asset as collateral for the loan. Collateral means that you need to submit an asset as a future security of the loan so that the lender can take your asset in his possession in case of default.

Normally, secured loans are processed quickly if the borrower can submit a certified valuation report for the assets in the pledge.

Moreover, a secured loan comes with lower interest rates due to the lender’s low risk of borrowing.

Try alternative funding options instead

If your personal loan application is rejected, there are several alternative funding options to consider.

Here are a few alternative funding options you can use in case of loan is rejected:

Using your own savings (if there are any) can be a good idea. You need to be aware that your emergency savings are still in place and you have calculated the opportunity cost.

You can ask for temporary financial support from your family members or friends. If you have received it, try to repay so that you can get access to such funds in the future.

Home equity loans and lines of credit can also be a good option. These loans often have lower interest rates compared to personal loans because they are secured by your home. However, If you fail to repay, you risk losing your home.

Getting a loan from yourself using the 401(k) method can also be an option. A 401(k) loan represents that you’re borrowing from your own retirement savings, potentially at a low interest rate. Such loans do not depend on your credit score but, Reduce the amount available for retirement and potential investment growth.

Pawn shops can be the last place to access emergency funds. It is familiar for quick disbursement but such loans have high interest costs. You do not need any credit report from the pawn shops but if you fail to repay, the pawned item can be sold by the pawn shop.

Frequently asked questions

Conclusion

Facing a rejection with a loan application is normal. If you can identify the denial reason, you can work on the causes by building your credit, cooperating with necessary documents, and increasing your debt performance.

There is always time to rectify the denial reasons and reapply for a new personal loan later.