What to do if your loan application is denied

When your loan application is rejected, you’ll have to take a look at your finances and figure out where you can improve. (iStock)

No matter why you applied for your loan, the process can be a bit nerve-wracking, especially if you’re not feeling confident that your lender will approve your application. If your lender does deny your application, you may be feeling embarrassed or frustrated. Having your loan application rejected may feel awful at the moment, but it can also be a helpful experience.

When you have a loan application rejected, you’ll have to take a look at your finances and figure out where you can improve so you don’t have issues the next time you request a loan.

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

  • A history of late or non-payments
  • High credit card balances
  • Low income
  • Foreclosure
  • Bankruptcy
  • Not enough credit history
  • Accounts in collection

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


Read your explanation letter

When a lender denies your loan request, they are required to send you an explanation letter. In the letter, they’ll tell you the reasons they passed on financing your loan. Some explanation letters will also include your credit score. Reading over the letter can help you identify specific areas you can work on before you apply again.

Raise your credit score

One of the best ways to encourage lenders to approve your loan application is to improve your credit score. Your credit score is a quick metric that lenders use to determine how much of a risk it would be to lend you money.

Your credit score consists of five major components:

  • Payment history
  • Credit utilization (debt-to-income)
  • Credit age
  • New credit
  • Mix of credit

Your payment history and credit utilization make up roughly 70 percent of your total score. You can make the biggest impact on your credit score by making your debt payments on time and lowering the amount of debt you have 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 keep their debt-to-income ratio at 15 to 20 percent, though individuals with a mortgage could go up to 36 percent and maintain a healthy credit score.


Save a bigger 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 could make it easier for you to qualify. A bigger down payment can be helpful if you have a lower income or a higher debt-to-income ratio than recommended.

Ask someone to cosign

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 cosign. The person who cosigns for the loan makes a legally binding agreement to take responsibility for the debt if you are unable or don’t pay the lender. Your co-signer would need good or excellent credit and be willing to take the responsibility of the loan should you fail to meet your repayment obligations.

Wait to reapply

Don’t just apply for another loan immediately after a denial. Too many hard inquiries on your credit report can drop your score, making it harder to receive approval from a lender.

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