There are a lot of reasons loans are denied. A lack of credit history, high debt-to-income ratio, or a recent change in jobs or income can disqualify you for a loan. Lenders want to loan money to applicants who are likely to repay the loan on time and without missed payments or other trouble. Certain factors, such as limited credit history or abundant debt, are red flags to lenders because they can make you appear unreliable. Therefore, if it looks like it could be difficult for you to repay the loan, the lender may reject your application to spare themselves the trouble of having to hunt down repayment later.
But a rejected application does not have to be the final word. If you are denied a loan, there are several steps you can take to improve your chances at approval when you reapply.
1. Find out why you were denied
It is difficult to know what to work on when you are not sure why your loan application was denied. A rejection letter does not have to be the end of the discussion. Rather, let the rejected application be a starting point for a conversation with your lender. Ultimately, the lender may not see you as a good candidate for a loan now, but that does not mean the lender does not want your business. Find out why your application was rejected to identify weak spots where you can improve before reapplying later.
2. Work on your credit history
The best indication of future behavior is past performance. Therefore, if you have a positive, lengthy credit history, it shows the lender that you are likely to make timely payments with a new loan. A lack of credit history does not mean you will not be a good borrower, but there is insufficient evidence to give the lender peace of mind that you will not be problematic to work with.
Becoming an authorized user on an established line of credit, like a parent’s credit card, can be a quick way to add some longevity to your credit history. Though your credit score may take a small hit, opening a secured credit card and using your new line of credit responsibly can also help you build your credit history. There are also credit-builder loans or personal loans paid in installments, that can create the narrative that you are a reliable borrower. You can also increase your credit limits with existing accounts. This not only shows that your current lenders see you as reliable but also helps boost your credit utilization.
3. Review your credit report
It is always a good idea to monitor your credit. You should check your credit regularly, to make sure your report is free from errors and to know your score. Paying down credit balances and other minor changes can drive your score up, but that also means a missed payment or rising credit card balance can drag your score down. Stay aware of what your credit score is and focus on making smart moves to boost your score.
Mistakes happen and a reporting error on your credit report may be the cause of a lower-than-expected score. In addition to watching your score, scan your report for bad information such as fraudulent accounts or charges, incorrect payment statuses, or other errors. You can reduce the risk of erroneous red flags in your credit history by keeping your report clean and free from error.
4. Reduce your debt
Your debt-to-income plays a significant role in a lender’s decision to approve or deny your loan application. Therefore, one of the best ways to improve your chances of getting the loan you need is to improve those numbers. Lower your debt as quickly as possible by making extra payments when you can and prioritizing the payoff on any accounts that may be in collections or past due status. You will get the biggest credit boost from paying off a balance completely, but when that is not possible, making timely payments and throwing a few extra dollars at open accounts quickly will still improve your credit.
Once a debt has been paid, do not rush to close the account. Closing accounts, especially those with a longer life that have helped to build your credit history, can hurt your credit. A good loan candidate has a mix of credit cards, auto loans, student loans, and personal loans on their credit report, all in good standing, of course, to show that you are a reliable borrower who can handle credit.
A good loan candidate has access to plenty of credit but is not necessarily using it. This is referred to as credit utilization. You do not want to have all your credit tapped out. This tells future lenders that you are overextended and suggests you may be the kind of borrower who “robs Peter to pay Paul.” Therefore, it is best to keep your accounts open, even after you have paid off the balance in full and no longer plan to use the account. Rather than closing the account, simply cut up and dispose of the credit card or limit your access to the information needed to use the account so you are not tempted. Having available credit is a good indication to potential lenders that you can manage debt well and are not overextending your finances.
5. When all else fails, use collateral or a co-signer
If you are in urgent need of a loan or if you have made significant strides to beef up your loan application and are still denied, wagering collateral can help you become a more attractive candidate to a hesitant lender. However, this can be a risky move as your home or whatever you select as collateral for your loan could be repossessed if you default on the loan. Likewise, having a co-signer with good credit can help you get approved for a loan. But, both you and your co-signer need to keep in mind that if you default on the loan, your co-signer is just as much on the hook for the debt as you are.
