Question

what should you do if your lender rejects your loan application

Answer 1

If your loan application is denied, you might not know where to turn or what to do next. You can start by finding out why were you denied, how long you need to wait before applying again, and what steps you can you take, right now and in the future, to prevent it from happening again.

This applies to any type of loan you might 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.

Analyze Your Situation

Find out why your loan application was not approved. Lenders are generally glad to give you an explanation and they’re required to provide certain disclosures, so there’s no reason not to find out.

Before Re-Applying

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

Examine your credit report, and ask lenders if they anticipate any problems. They’ll gladly explain what matters and what doesn’t, and how long you need to wait after certain events like a 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 such as a local credit union, you might be able to speak with a lender directly to learn everything you need to be prepared before you fill out another application.

You can also work through the following steps to clear up your finances and become a better loan candidate.

Initial Steps

Some initial steps are important for a healthy financial future, such as:

• Fix errors: If you have 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.
• Pay off other debts: Your other loans could be part of the problem. Lenders look at how much you spend on debt repayment each month, so reducing that expense makes you look better as a borrower.

Immediate Strategies

There are also strategies you can use that have an immediate effect on your credit score or may result in being approved for the loan:

• Down payment: A larger down payment for a home or car 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.
• Use collateral: If you’re applying for a personal or business loan, collateral might help you get approved. 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 a 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 be responsible for repaying the loan. If you fail to repay, the lender will go after both you and your cosigner, and her credit will suffer, so only use a cosigner who is willing and able to understand that risk.
• Apply somewhere else: 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 such as home and auto loans, in particular, it’s best to “bunch” your applications into a short window of time of 30 to 45 days at the longest to minimize damage to your credit from too many hard inquiries in a short time period.