Can a Declined Loan Be Approved? What to Do When Your Loan Application Gets Rejected

Getting rejected for a loan can be disheartening. You may have your heart set on buying a new car, renovating your home, or consolidating high-interest debt But when that loan application gets denied, your plans come crashing down

It’s normal to feel disappointed, but don’t lose hope. There are several things you can do to get approved the next time around.

In this comprehensive guide, we’ll cover:

• The most common reasons for loan denial
• Steps to take after your loan is declined
• Tips to improve your chances of approval
• Alternatives if you need funds before your credit improves

Why Was Your Loan Application Declined?

Lenders are required to send you an adverse action notice explaining why they denied your loan application. This notice should clearly state their reason(s) for rejection.

Review this notice closely to understand where you fell short Knowing the exact reasons for denial will help you take the necessary steps to get approved next time.

Here are the most common reasons lenders reject loan applications:

1. Poor Credit History

Your credit reports and scores are the first things lenders review. If you have late payments, collections, bankruptcies or other derogatory marks, it can negatively impact your credit.

Most lenders have a minimum credit score requirement. If your scores fall below that threshold, your application will likely get denied.

2. High Debt-to-Income (DTI) Ratio

Your DTI ratio compares your total monthly debt payments to your gross monthly income. Most lenders look for a DTI of 50% or less.

If it’s too high, the lender might think you won’t be able to pay back the new loan.

3. Unstable Income

Lenders want to see stable income over time. It may be harder to prove your income if you work for yourself, have more than one job, or have just recently changed jobs.

4. Insufficient Income

The lender may turn down your application even if your income is stable if it’s too low to get the loan amount you want. Each lender has its own minimum income requirements.

5. Incomplete Application

Failing to submit all required paperwork can lead to automatic denial. Double check you included income documentation, ID, and any other required materials.

6. Loan Purpose Restrictions

Some lenders restrict allowable uses for personal loans. For instance, they might not let you borrow money for things like school, investments, or your business. Make sure your intended use aligns with lender requirements.

What to Do After Your Loan Is Declined

Getting rejected isn’t the end of the road. Here are some steps to take after receiving that dreaded denial notice:

Review Your Credit Reports

Order free copies of your credit reports from Experian, Equifax and TransUnion. Verify all information is correct – inaccuracies can unjustly lower your scores.

Dispute any errors with the bureaus to improve your chances next time.

Understand Your Scores

Knowing your credit scores can help you set expectations when applying for loans. Scores under 620 are considered poor, 620-679 is fair, and 680+ is good to excellent.

Shop for lenders that work with your credit range to avoid wasting applications.

Analyze Your Debt-to-Income Ratio

Calculate your DTI by adding up minimum monthly payments and dividing by gross income. If it’s over 50%, focus on paying down debts before reapplying.

If you can’t pay down debts quickly, consider adding a cosigner with better credit to improve your DTI for approval.

Fix Any Application Errors

If your application was incomplete, find out what documents the lender needed and be sure to include them next time. Ask what they require upfront to prevent another denial.

Adjust the Loan Purpose

If you were denied because of an unacceptable loan purpose, you’ll need to either adjust the purpose or find a lender without that restriction.

Most allow debt consolidation, but school, business, and investing are commonly prohibited uses.

How to Improve Your Chances of Loan Approval

If low credit scores or high debt led to your denial, improving your credit and finances can significantly boost your odds of approval in the future.

Pay Down Debt

Reducing credit card and loan balances lowers your DTI ratio. Pay off smallest debts first with the debt snowball method, or highest interest debts first with the avalanche method.

Make Payments On Time

Payment history is the biggest factor in your credit scores. Set payment reminders and automate payments to avoid late or missed payments.

Limit Hard Credit Inquiries

Too many applications in a short period can lower your scores. Wait a few months before applying again and limit applications to loans you are likely to qualify for.

Become an Authorized User

Ask a family member with good credit to add you as an authorized user on their oldest credit card. Their on-time payments will be reflected in your credit history.

Dispute Credit Report Errors

If your reports contain mistakes, file disputes immediately to correct the errors and improve your credit profile.

Monitor Your Credit

Sign up for free credit monitoring to track your scores and get alerts when changes occur on your credit reports. Monitoring helps catch issues early.

What to Do If You Need Funds Before Your Credit Improves

Rebuilding credit takes time. If you need money now, here are some options to consider:

• Secured Loan – Backed by collateral, easier to qualify for than unsecured loans.

• Credit Builder Loan – Ideal for establishing credit history and improving scores.

• 401k Loan – Borrow from your retirement savings. Must be repaid.

• Cash-out Refinance – Tap home equity if you have sufficient equity.

• Credit Card – Easier to qualify, but high interest rates.

• Payday Alternative Loan – Offered by credit unions at lower rates than payday loans.

• Family Loan – Borrow from a relative or friend at zero or low interest.

The takeaway? Don’t get discouraged if your loan application gets denied. Review the reasons, make improvements, and you can get approved next time. Monitoring your credit, reducing debts, and finding the right lender for your situation can make a big difference.