You’ve just been notified that your loan application is declined. What now? Before you jump headfirst into decisions, there are few things you need to assess. Find out why it was denied and at what stage of the application process. Read on to learn about what you should do if this happens to you.
Possible reasons your loan application was declined
There are many reasons why your application could have been declined. Find out why by getting in touch with your lender or check out your credit report. This is for free once a year and will break down all you need to know to understand your loan application status. Some reasons why your application could have been declined include:
- Low or no credit: If you haven’t taken out any credit or had a credit card before applying for a loan, chances are you do not have any credit on your name yet. This means that your credit history is nonexistent, not indicating to lenders of your borrowing risk. If you have credit, make sure you check your credit score before applying. A low credit score shows that you are high risk to lenders as it could be due to multiple loan applications or missed payments.
- Low income: You need to have enough income to show that you can meet monthly repayments. Make sure you understand how much you might need to meet this requirement.
- High DTI: Your debt-to-income ratio represents the balance between how much debt you owe against how much you earn. The optimal ratio is 30%, if it is way higher than this, lenders see this as a potential risk as you might not be able to handle more debt on your income as is. To lower your DTI you will need to pay back existing debts or increase your income streams.
- Error in your credit report: Although this is not common, errors in credit reports like identity theft or a misunderstanding with a previous lender could come up. These could stay on your credit report for some time, and affect your loan applications.
- Incomplete paperwork: A missed document requirement could lead to your application being declined. Use a checklist to make doubly sure you’ve submitted everything you need. For more information read our Ultimate Loan Guide.
What to do next?
After you’ve determined the possible reason why your loan application was declined, take action to rectify errors or improve your financial status before you apply again. This will give you a better chance to get your application approved.
Fix errors on your credit report
If there was a glaring error on your credit report, contact your credit bureau and identify the errors. Fraudulent activities should be investigated and removed from your credit report.
Build your credit
Tackle a low or no credit score by paying credit card bills above the minimum payment amount. This increases your credit score as long as you avoid missing or making a late payment. You could also apply for a credit-building loan. However, you should avoid making hard credit enquiries as this can cause a dip in your score.
Grow your income
Increase how much you earn to ensure that you can meet lenders’ requirements. Add to your income revenue streams through side hustles or negotiate an increase in your salary.
Lower existing debt
Try to make the maximum payments that you can on your debts and put a payment schedule in place so that you avoid missing payments. Speak to a debt consolidator if you need help meeting payments on multiple debts.
How long should I wait to apply for a loan after being declined?
A rejected loan application does not stay on your credit report nor does it affect your score. Before you apply again, prepare everything you need to ensure approval. Compare loans to find one that is suited to your particular financial situation. Gather all the documents needed and double-check your information for accuracy. If needed and possible, add a co-signer with a good credit score if yours do not meet the standards. This will help you qualify at a lower interest rate. Apply with the intention to get approved and with confidence!