At some point in your life, you’ll probably need a loan. Whether you’re preparing to buy your first home, a new car, or want to consolidate debt, there’s always a chance your loan request may be denied. While not being approved for a loan can be disheartening, don’t beat yourself up.
Loan denials can happen for a variety of reasons – some of which may be quick fixes. So, instead of feeling all is lost, just think of your loan as not being approved yet.
Why Wasn’t Your Loan Approved?
Since there could be many reasons your loan wasn’t approved, you must find out the exact cause for the denial before taking any action. All lenders are legally required to inform you how they came to their decision if you inquire.
The two most common reasons for loan denials involve your credit history and your ability to meet your financial obligations.
While your credit score provides a quick glimpse of your ability to manage credit, lenders will dive deeper. They will review your entire credit history to see how much debt you have, the types of loans you hold, how well you manage those obligations, and how frequently you’re applying for new credit.
The reason lenders do this is because they are assessing how great of a risk it is to lend you money. They need assurance that you will repay them on time; they are unlikely to approve the loan without that confidence.
- Inability to Make Payments
Another area lenders will review when approving loans is your ability to repay the balance. First, they will check your monthly income, then any outstanding debts. If they believe that you cannot pay back the new loan due to insufficient income or your existing debt is too high, the lender will deny your loan request.
What to Do After a Loan Denial
Once you understand why your loan wasn’t approved, it’s time to address the issues. In most cases, you can fix the reasons for the denial with a little time and effort. The following steps can help improve your chances of being approved when you reapply in the future:
Unsecured debt is any loan without collateral. Common examples include credit cards and personal loans. Focus on eliminating as much of this debt as possible. Doing so will improve your Unsecured Debt Ratio and Credit Utilization Ratio – two figures that lenders use when reviewing loan applications.
Unsecured Debt Ratio is calculated by taking your total dollar amount of unsecured debt and dividing it by your annual income. Then, multiply that number by 100 to get a percentage. Lenders prefer to see this number below 20%.
Credit Utilization Ratio shows how much of your available credit you are utilizing. To calculate this figure, add up all the outstanding balances of your revolving lines of credit (e.g., credit cards). Then, divide that number by the total credit limit of all revolving lines of credit. Finally, multiply that figure by 100 to get a percentage. Lenders prefer to see this number below 30%.
Many websites and apps only provide your credit score, which won’t help you identify errors. Instead, you can obtain a copy of your entire credit report yearly from each of the three major credit bureaus (Experian, Equifax, and TransUnion) at www.AnnualCreditReport.com.
Once you have your full report, look for errors or possible fraudulent accounts. Mistakes do happen and clearing them up can give your score the boost you need.
Your payment history plays the most significant role in determining your credit score. Always make your payments on time and pay at least the minimum amount due on your loans. If you’re unable to make a payment, call your lender before the due date to see if there are solutions available that won’t negatively impact your credit score.
Lenders can see when you apply for loans at other institutions. If you’re applying for multiple loans in a short period, it may cause lenders to believe you’re in financial trouble. Therefore, refrain from taking out new loans unless absolutely necessary.
Although being denied a loan can be disappointing, it’s not the end of the road. Instead, think of it more as a speedbump. Find out why your loan wasn’t approved and work to address the issues. Sometimes the solutions can be a simple fix. Other times it may require a little more work on your end.
Remember, lenders aren’t trying to be unkind when they don’t approve a loan. Their requirements and procedures are there to help and protect you. If they approve a loan you cannot repay, it will likely lead to other financial challenges for you and your family. Instead, ask them for suggestions on improving your chances of being approved when you reapply.
We’re Here to Help!
If you were recently denied a loan at another financial institution, we’re here to help. Please give us a call to speak with a member of our lending team. We are happy to work with you one-on-one to find ways to improve your credit so that we can approve your loan in the future.