You went through the process — you filled out all the paperwork and were ready to land that financing, whether it was an auto loan, personal loan or something else. Then, after all of that, your loan request was denied. Loan denial happens, but now what? First, you should relax and take a deep breath. Believe it or not, being turned down for loans can be a good thing. Loan denial alerts you to a problem with your credit or financial situation: The trick is to use this opportunity to get the problem(s) fixed. Here’s what you should do after loan denial so that next time it’s more likely you’ll be looking at loan approval.
The first step is to figure out why you were turned down. If you haven’t already, you should receive a letter from the lender shortly that describes why you didn’t meet the lender’s criteria. The Equal Credit Opportunity Act exists so that lenders are required to explain why you’ve been denied a loan. Once you have the letter, you’ll want to review it so you have an understanding of their reasoning and you can get a game plan together for remedying the situation.
Reviewing Your Credit
Since the whole process can take a few weeks, it would be smart to get started now instead of waiting for that letter to arrive. When you first learn that you’ve been turned down for a loan, it’s a good idea to check your credit reports from the three major credit reporting agencies — Equifax, Experian and TransUnion — right away. You can see copies of your credit reports once every 12 months for free by visiting AnnualCreditReport.com. You’ll get an idea of how lenders view your credit data. Keep in mind that checking your own credit does not harm your credit scores.
Once you have your credit reports, you’ll want to look closely for any negative items such as late payments, collection accounts or bankruptcy filings. These negative records lower your credit scores and can make you appear riskier to lenders.
Aside from noting the types of records on there, you’ll want to make sure everything appearing on your credit reports is accurate. If the records are correct, you can calculate their expiration date to see when they will age off your credit reports (usually after 7-10 years). If the records are inaccurate, you can file a dispute to have your credit report fixed.
If you believe your credit has been damaged by identity theft, it’s important to act quickly. Reporting the case to the credit bureaus and law enforcement in a timely manner can make it much easier to remove the fraudulent records from your credit reports.
Note that each of the three main credit bureaus often report slightly different information, as not everywhere reports to each bureau and they don’t share information. If you find the same error on multiple reports, you’ll need to file individual disputes to each applicable credit bureau.
The Importance of Your Credit Scores
In addition to the finer details on your credit reports, it’s a good idea to take a look at your credit scores. There are five main factors that impact your scores — payment history, credit utilization (how much debt you have in relation to your total credit limit), average age of your credit accounts, the variety of credit accounts you have and the number of inquiries on your credit profile.
You can see where you stand on these credit score influencers by getting a free credit report snapshot, complete with two free credit scores, on Credit.com. With this credit snapshot, you can gain insight into the factors impacting your credit standing in a positive way and what areas you may need to work on improving. You can use this analysis to figure out why you might have been turned down and what you can do to improve your scores. For example, you may need to reduce your debt balances, improve your payment behavior or work on your balance of accounts. Don’t wait to make these changes until the letter arrives. Now is the time to start making improvements, as you’ll expedite when you’ll see results.
Receiving the Explanation Letter
Once your loan denial letter arrives, you can use that insight to see if the information you gathered while reviewing your credit (and your guesses as to why you were denied for your loan) match up with the lender’s reasons for denial. If it does, great job — you’ve already started working on improving your credit and fixing the problems.
If it doesn’t, you may need to do some more research, including talking with your lender for more details. Aside from credit concerns, the lender could’ve rejected your application for many other reasons, including your debt-to-income ratio, an error in your application or lending restrictions for your state. If 40% or 50% of your earnings are used to pay your debts, a personal loan lender will be concerned, so that debt-to-income ratio is extremely important. If you have questions about why you were turned down, call the lender’s customer service team for more information.
Oftentimes lenders are most cautious about giving out loans when your credit report doesn’t look promising. Any late payments, defaulted loans or high amounts of debt are major red flags and suggest to a lender that they probably shouldn’t trust you. Numerous hard inquiries also suggest to a lender that you’re desperate for a loan and aren’t having much luck — why would a lender be the first to approve you when they realize none of their competition has?
There are other factors of your financial standing that send signals to lenders about your trustworthiness. If you’re unemployed or have only been employed for a short amount of time, lenders will assume you don’t have stable income.
Recently acquired debt also shows lenders that your finances have just changed and might not be as in balance as you suggest, which probably will concern them. Any discrepancies in your file will alert and confuse them, so answer everything they ask honestly, and provide them with any documents they need. If you lie about your income or refuse to show them certain statements, they’ll most likely reject you or at least be very wary and extend the process.
The loan denial letter also includes instructions for obtaining a free copy of the credit report that was used for your application. You’re still entitled to receive this free credit report if you have been turned down for a loan, even if you’ve already requested the three free credit reports you can get each year from AnnualCreditReport.com. It’s a good idea to make sure you use this free report opportunity. If you’ve already started working on improving your credit, you can use this free additional report to see if anything has changed since you started the process.
When It’s Time to Apply for a Loan Again
Ideally, you should only consider applying for a new loan after you’ve gone through the process of reviewing your credit, the loan denial letter and taking steps to improve the situation to help prevent another loan denial.
Each time you apply for a loan, your credit scores get dinged with a “hard inquiry,” which lowers your scores. (Note: Inquiries remain on your reports for two years, but only affect your credit scores for one.) Thus, you could damage your credit scores simply by applying for multiple loans that you know you may not get. If you can, wait to reapply for a loan until you’ve worked on improving your credit and financial standing. This way, when you submit an application again, you’ll have better odds of loan approval and you won’t suffer from an inquiry only to be denied again.
Another solution could be to bulk up your credit file by applying for a secured credit card in the meantime. Using this card responsibly proves to lenders that you can handle credit and potentially a small loan. You can check out sites like PersonalLoans.com, BadCreditLoans.com and Avant.com as they offer loans to people with bad credit, and they’re known for having high acceptance rate loans.
If waiting simply isn’t possible because you need money now (and can’t qualify for a personal loan), you can investigate other ways to borrow money. Emergency loans or the credit cards we mentioned could provide you with the money you need. You can also consider using savings, borrowing from a family member or friend or asking your employer for an advance and working out a payment plan.
Being turned down for a loan isn’t ideal, but it can be a good opportunity to take a hard look at your credit and financial standing in order to improve your situation.
Hannah Maluth contributed to this article. It has been updated and was originally published November 21, 2016.