If you have recently been denied a loan, you're not alone. Understanding the explanations why the loan was denied will help you determine your next steps and improve your chances of getting approved the next time you try. Even if the sting of denial may still be fresh, this is what you can do.
Understanding Why The loan Was Denied
In case your application for the loan is denied, the lending company will be sending you what is known as an adverse action letter that explains why.
Your credit report as well as your income would be the primary reasons a lender may deny the application, but with respect to the situation, there may be other reasons too. Here are a few of the potential factors that may bring about your denial:
Credit
Your credit history and credit ratings are primary factors lenders consider whenever you submit financing application. Most negative items remain on your credit history for seven years, however their effect on your credit typically lessens over time.
If lenders use whatever significant negative items in your credit history or other warning flags, they may determine that, like a borrower, you're too risky to approve at this time. Common credit history items which can impact your score and potentially contribute to a denial include:
- Bankruptcy
- Foreclosure
- Collection accounts
- Delinquent payments
- High charge card balances
- Too many recent credit inquiries
- Not enough credit rating
You can also be denied if your credit score is lower than the lender's minimum requirement. To prevent this from happening again, make sure you know your credit scores and shop around for loans which are geared to your credit range.
Income
In case your lender denies the loan application based on income, two issues would be the likely culprits. The first is that the income doesn't meet the lender's minimum requirement. Since most lenders don't publish this information, it's hard to know in case your income is high enough to meet their standards unless you ask or apply.
The other reason is that your debt-to-income ratio (DTI) is simply too high. You are able to calculate this ratio by dividing your total minimum monthly debt payments by your monthly revenues.
Most lenders need a DTI of 50% or less, and mortgage brokers might have to go as little as 43% or even lower. If yours is simply too high, lenders could view you as unable to afford an additional loan payment. To enhance your chances of getting approved the next time you apply, work on paying down a number of your debts—or upping your income.
Other Causes of Denial
While your credit and income would be the primary factors lenders consider, they don't tell the entire story. As such, you may be denied based on some other reasons, for example:
- Employment history
- Residence stability
- Cash flow or liquidity problems
- Too much existing available credit
When you may not have lots of immediate treatments for a few of these issues, take the reasons seriously and wait until you are in a better position to apply again.
Getting Denied Doesn't Hurt Your Credit Score
When you submit a credit application, the lender or creditor will generally operate a hard inquiry on one or even more credit reports, which will be notated on your reports. For most of us, a hard inquiry knocks less than five points business credit rating, but that little dip will not last long—Twelve months at the most.
If you are denied, though, it does not come with an additional impact past the initial inquiry. If you are unsure about whether you'll be eligible for a financing and want to avoid a hard inquiry, consider lenders that offer prequalification. This process enables you to gauge your eligibility as well as view initial rate quotes with just a soft inquiry, which won't impact your credit.
How to obtain a Loan When You Have Bad Credit
Whether you need money to finance a sizable purchase, cover bills or consolidate debt, it could be easy to achieve this despite poor credit.
Choose a Lender That are experts in Bad-Credit Loans
Some lenders specialize in dealing with borrowers with bad credit and also have less stringent credit requirements. The issue is that your interest rate will generally be higher than what you'd be eligible for a with fair, good or excellent credit.
Apply Having a Cosigner
Ask a loved one with higher credit to use along with you as a cosigner. A cosigner applies for the loan along with you and could enhance your chances of getting approved. Even though you could possibly get approved by yourself, enlisting a cosigner with a great credit rating will help you score a lower interest rate.
Bear in mind, though, that cosigners are equally responsible for paying down the debt. So if you default, it could damage both your credit and theirs.
How to Build Your Credit Before you apply for an additional Loan
While you can get approved for a financial loan with less-than-stellar credit, you might be best waiting before you can improve your credit rating scores. Doing this could save you on monthly payments and interest fees within the lifetime of the borrowed funds.
Review the Adverse Action Letter and Your Credit Report
By law, you're entitled to a free copy of your credit history if a application for the loan is denied. The lending company should provide instructions in your declination letter for requesting a totally free report from the credit rating agency that provided the report the lender used to make its decision.
If you don't receive these instructions, you can still request your report directly from the credit reporting agency listed on your declination letter. With Experian, for example, the Report Access page offers immediate access for your report through a secure, encrypted connection.
To enhance your credit, focus first on the reasons as part of your declination letter. Also, obtain a copy of your free credit score and appearance to see if there's anything else you have to address.
Practice A good credit score Habits
Regardless of the reason behind your denial, focus on practicing good credit habits to enhance your credit with time:
- Make your monthly obligations promptly: Your payment history is the most important factor in your credit rating, and payments which are at least Thirty days late appear on your credit history as negative items.
- Keep your credit card balances low: Your credit utilization rate—your total credit card balances divided by their total credit limits—is another essential aspect in your credit score. If you have high balances, outlay cash down as soon as possible, then keep them low going forward.
- Avoid a lot of hard inquiries: In case your loan application was denied, it may be tempting to apply again and again until you get approved. But while each hard inquiry does not have a big impact in your credit by itself, multiple in a short time may have a compounding impact on your credit score.
Improving your credit can take time. But when you do it right, you could save hundreds of dollars or even more next time you apply for a loan.
Monitor Your Credit to trace Your Progress
Using Experian's free credit monitoring service, you are able to track how well you're progressing toward a greater credit rating and spot potential issues as they arise, so you can address them promptly. The service not only offers free access to your credit rating and Experian credit history, but also provides real-time alerts when changes are made to your Experian credit history.