What to do when your loan application is refused

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You were ready to buy that new car or that new house. You might even have chosen the cherry red convertible or the Cape Cod with the spacious yard – until your bank stops you in your tracks. Your loan has been refused and you don’t know what to do. It’s a fairly common scenario, and unfortunately, there isn’t always a quick fix.

But all hope is not lost. Here are some things you can try to get the financing you need.

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1. Find out why your application was denied and fix the issues

The first step is always to understand why your loan application was refused. This can give you an idea of ​​what you need to do to get approved. Your bank should send you a letter explaining why they chose to deny your request.

You may have been denied because your credit score is too low. Maybe you have a lot of debt that you are struggling to pay off. Or maybe you don’t always make your payments on time. These things make creditors nervous about your ability to repay the loan. If you want to increase your chances of being accepted, you will need to work through these issues, and it can take time. But it will not only increase your chances of approval, but also help you get better interest rates, which is well worth it.

If you’re confused as to why your application was denied, it’s a good idea to pull out your credit reports and look for anything that’s out of place. For example, if you see an unpaid debt that you are sure you have repaid, this creditor may have made a clerical error. In this case, call the creditor – with proof of payment in hand – and request that the account be declared paid.

You should also scan your report for accounts that you don’t recognize. If you see an account you didn’t open, you may be a victim of identity theft. In this case, you should immediately alert the lender, call the credit bureaus to place a fraud alert on your credit file, and file a report with your local police station. This may take some time to sort out, but once you do, you can reapply for the loan.

Another reason your loan application may be denied is if you do not show sufficient income. Creditors often look at your debt-to-equity ratio when deciding whether or not to lend to you. If your total debt is more than 30% of your income, it tells lenders that you may be living beyond your means. You can fix this by paying off your debt and making sure the creditor has accurate documentation of your income.

2. Use a collateral or co-signer

If you need the money now and cannot quickly resolve the issues listed in the letter of explanation, you need to find a way to minimize the risk you pose to lenders. If you were applying for an unsecured personal loan, you may be more likely to offer something as collateral, like your car. That way, if you don’t pay, the bank has a way to get some of their money back. Due to the reduced risk of loss, the lender may be more willing to give you the loan.

Some loans, including mortgages and auto loans, already have collateral, which is the home or vehicle they are financing. If you are denied one of these loans, you may need to find a friend or family member who is willing to co-sign with you. Their good credit can reassure the bank about the repayment of the loan, because if you do not pay, the lender can demand payment from the co-signer.

Before using a guarantee or a co-signer, you should think carefully about your decision. If you offer an asset as collateral and you do not meet your payments, you will lose that asset and a good part of your credit score. If the loan has a co-signer and you don’t pay, then you’re placing a huge financial burden on the co-signer – and potentially ruining a relationship in the process. Unless you’re sure you can make the monthly loan payments, you’re better off waiting until you’ve improved your credit before reapplying.

3. Make a bigger down payment

You may be able to increase your chances of approval simply by decreasing the loan amount. When evaluating loan applications, lenders look at the loan-to-value (LTV) ratio, which measures the size of the loan relative to the value of the item you are buying. A high LTV ratio represents higher risk, as the value of the item, if sold, may not be sufficient to cover the full cost of the loan and provide sufficient profit to make the transaction worthwhile. the penalty for the lender.

Ideally, you can put down at least 20% of the total value if you’re buying a house or a car. Lenders usually offer the best rates to people who can pay at least that much up front. However, not everyone can afford it. In this case, do the math and figure out how much you can reasonably spend on the down payment. Let’s say you were turned down for a loan of $20,000 with a down payment of $2,000. If you can double the down payment to $4,000, you’ll have a much better chance of approval, as your LTV ratio will increase from 10% to 20%.

4. Ask for a loan elsewhere

All lenders rate risk slightly differently, so just because you’ve been turned down by one doesn’t mean you’ll be turned down by another. Of course, it all depends on why you were refused. If your credit score is below 500, you’ll probably have trouble getting a loan anywhere. But if your credit is 680 or better and there are no major red flags on your credit report, it may be worth trying another lender.

If you are going to apply elsewhere, it is better to do it quickly. Most credit score models count all serious credit inquiries that occur within a 30-45 day period as one credit inquiry, which means they have less impact on your credit score. Waiting any longer than this will put another hard inquiry on your report and may lower your score.

Being Denied a Loan Isn’t the End of the World, But You Need to Understand Why it was denied, then take action to correct the problem. By following the four steps outlined above, you should be able to get the money you need without much hassle.

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