What to do if your loan application is refused


When your loan application is rejected, you will need to take a look at your finances and determine where you can improve. (iStock)

Whatever your reason for applying for your loan, the process can be a bit overwhelming, especially if you’re not sure your lender will approve your application. If your lender denies your request, you might feel embarrassed or frustrated. Rejecting your loan application might seem awful at the moment, but it can also be a useful experience.

When a loan application is rejected, you will need to take a look at your finances and determine where you can improve so that you don’t run into problems the next time you apply for a loan.

There are many reasons why a lender may deny your loan application. The most common include:

  • A history of delays or non-payments
  • High credit card balances
  • Low income
  • Foreclosure
  • Bankruptcy
  • Not enough credit history
  • Collection accounts

Fortunately, there are things you can do if a lender rejects your loan application.


Read your letter of explanation

When a lender denies your loan application, they are required to send you a letter of explanation. In the letter, they will tell you the reasons they gave for funding your loan. Some cover letters will also include your credit score. Reading the letter can help you identify specific areas you can work on before you apply again.

Increase your credit score

One of the best ways to encourage lenders to approve your loan application is to improve your credit rating. Your credit score is a quick measure that lenders use to determine the risk involved in loaning you money.

Your credit score consists of five main elements:

  • Payment history
  • Use of credit (debt / income)
  • Credit age
  • New credit
  • Credit mix

Your payment history and credit usage is approximately 70% of your total score. You can have the biggest impact on your credit score by making your debt payments on time and reducing your debt amount compared to the amount you have available. The Consumer Financial Protection Bureau (CFPB) provides a form you can use to determine your debt-to-income ratio. The CFPB also recommends that individuals maintain their debt-to-income ratio between 15-20%, although people with a mortgage can reach 36% and maintain a good credit rating.


Save a larger down payment

Lenders may be willing to give you a loan if you can provide a larger down payment. Offering a larger down payment reduces the loan amount, which may make your eligibility easier. A larger down payment can be helpful if you have lower income or a higher debt-to-income ratio than recommended.

Ask someone to co-sign

If you don’t qualify for a loan on your own, you may be able to get a loan if you have someone willing to co-sign. The person who co-signs the loan makes a legally binding agreement to take responsibility for the debt if you can’t or don’t pay the lender. Your co-signer would need good or excellent credit and would be prepared to take responsibility for the loan if you fail to meet your repayment obligations.

Wait to reapply

Don’t just apply for another loan immediately after a denial. Too many inquiries about your credit report can lower your score, making it more difficult to get approval from a lender.

While it is frustrating to be denied a loan, it doesn’t have to be a long-term problem. Take the time to improve your credit rating, reduce your debt, and save on a bigger down payment, so you’re ready the next time you apply.


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