What do I do if my loan application is rejected?

Sure, getting your loan application rejected can be a downer. But most lenders review these applications by the book, and if they find something amiss, it’s nothing personal. Some lenders even use an automated system for this process. 

So, whether it’s a personal loan, car loan, student loan, or any kind of loan, here’s how to tick the right boxes that turn a no into a yes.

First figure out why your loan application got rejected

Understanding how lenders think is crucial to getting on their good side. This can be tricky since many factors come into play when lenders decide whether to offer you credit. The good news is, they usually tell you why you didn’t get their green light. 

Still, it’s a good idea to be aware of all factors that might trigger a rejection, so you not only avoid making the same mistake twice but also steer clear of other reasons for rejections.

Failure to meet credit score requirements

Your credit report contains both negative and positive information about your borrowing behaviour. Your credit score is a direct result of this information, and if it’s too low, most lenders will consider it a red flag. That’s because a bad credit score commonly results from the following negative information:

• Overdue accounts and poor payment performance
• Too many enquiries (from too many loan applications)
• Bankruptcy, court judgement, and insolvency

Lenders will also consider you risky if you’re a new borrower with insufficient information in your credit report. Your credit score will automatically be lower since there’s no way to determine if you’re a responsible borrower.

Inability to service the loan

Lenders have to do their due diligence when handing out loans. Keep in mind, they’re running a business, and profits happen only when you pay back what you owe. That’s why the following signs can make a lender think once or twice about your capacity to service the loan:

• High debt to income ratio. In other words, if you have too much debt compared to your income, a lender isn’t about to trust you with more debt. Each lender has a maximum debt to income ratio. When assessing your loan application, they’ll use information about your expenses and other debts to determine if you fit the bracket.
• Irregular income and unstable employment. Loan terms generally range from a year up to ten years. Therefore, keeping up with the monthly repayments requires long-term financial stability. You might not get credit approval if you regularly change jobs, have unreliable employment, or are self-employed with an irregular income. Some lenders may also decline your application if you don’t meet their minimum income requirements.

You don’t meet other qualification requirements

Eligibility requirements vary by lender. Sometimes you’re denied credit simply because you’re borrowing to purchase a business vehicle when the loan is for personal use only. Other times it’s because of your age, citizenship status, residency stability, or incomplete information on your application form.

Will a rejected application hurt my credit score?

A rejected application stings, but it may also leave you wondering if there’s any damage done to your credit score. The truth is, the denial doesn’t hurt your credit score, but the application that caused it might. 

That’s because the lender would have checked your credit score, and this enquiry is recorded in your credit report. Fortunately, a hard credit check only knocks off a few credit score points, and you can repair this easily as long as you avoid making too many applications. 

In any case, the enquiry is the only thing that shows up on your credit report, not the denial.

Quick tips for loan approval

You may still need credit approval soon after a rejected application. These short-term strategies may help turn things around for you.

Fix credit report errors

This is always a top recommendation for improving your chances of loan approval. Things like incorrect listings, computer errors, and out-of-date information can negatively impact your credit score. You can fix these mishaps by contacting the credit bureau that reported the information and asking for a re-scoring. In Australia, you can get copies of your credit reports from Equifax, Experian, and Illion. 

Find a lender that’s a better match

If one lender is not your cup of tea, many other Aussie lenders may be able to help you. For instance, while some financial institutions don’t offer bad credit loans, others specialise in providing credit to borrowers with bad and fair credit. 

You may also be able to prequalify, meaning you’ll know details such as loan amount and interest rate, before accepting the loan. What’s more, prequalifying usually involves a soft credit check that won’t impact your credit score. 

Overall, it’s essential to do your homework and even get in touch with the lender before applying to ensure you’re on the same page. 

Online loan comparison websites usually have information on many traditional banks, credit unions, and online lenders. This makes it easier to find a credit provider that’s more suited to your situation.  

Go for a secured loan

A secured loan reduces the lender’s risk since it requires collateral the lender can hold on to if you default. Collateral can be your car, savings account, or other valuable property. Besides improving your chances of approval, secured car loans and secured personal loans also offer a lower rate and the flexibility to borrow more.

Get a co-signer

If you’re not eligible for a loan, for some reason such as bad credit or being under age, a co-signer with better qualifications might help. This person will agree to cover your repayments if you default, thereby reducing the lender’s risk. Keep in mind that co-signed loans are different from joint applications, which require both applicants to be eligible for the loan.

Borrow less

Choosing an affordable loan also increases your odds of approval. That’s why a personal loan calculator and car loan calculator are handy tools to use before applying. If you’re financing a car, a down payment or balloon payment can also help you reduce the amount you have to borrow.

How to become more of an ideal borrower

Becoming an ideal borrower takes time. However, using the following strategies is well worth it if it helps you avoid rejected applications down the line.

Build your credit score

Boosting your credit score is mostly a matter of paying down existing or current debts and making repayments on time. Things like paying off your credit card debt can lower your credit utilization rate and debt to income ratio, which are all great signs of a responsible borrower.

Boost your income

Increasing your earnings via a side hustle or job upgrade helps you qualify for better loans, though it’s not always possible. However, you can still use your current income to create more savings. The more cash reserves you have, the more creditworthy you become, especially if you use the cash reserves to secure the loan.

Avoid too many loan applications

If your loan application is rejected and you still need the money, you may want to keep applying until a yes comes your way. But as mentioned earlier, loan applications beget hard enquiries. These may have a big, negative impact on your credit score once they pile up.

The final word

There’s much you can do to improve the situation when your loan application is rejected. Use the short-term and long-term tactics outlined above to boost your credit score and become the ideal borrower. One last word of advice: Talking to a financial counsellor helps if your finances are stopping you from borrowing money when you need to.