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What to Do If You Get Rejected for a Loan
So, you’ve applied for a loan, and unfortunately, things didn’t go as planned.
Well, you’re not alone.
In June 2023, the overall rejection rate for credit applicants increased to nearly 22% — its highest point since June 2018 — according to a report by the Federal Reserve Bank of New York.
The increase affected people in different age groups and was highest among people with credit scores below 680, the report found.
So what happens when you get rejected for a loan? We’ll explain what it takes to get a loan, why lenders might slam the door on your application and most importantly, how you can improve your odds and even snag a loan with bad credit.
You’re eager to get a loan, but do you know what lenders look for? Let’s start with the basics.
Whether you’re looking to a buy a house or get a personal loan, you typically need to meet these requirements:
Getting rejected for a loan can be disappointing, but understanding the reason behind it can help you make positive changes moving forward.
Bad credit, unstable income and high debt-to-income ratios are a few of the main reasons personal loans get denied.
The first thing you should do after getting denied for a loan is to find out why.
If your loan application is denied, the lender will send you what’s called an adverse action letter that explains why, according to Experian, one of the three credit reporting agencies.
Even if your lender fails to send this letter, give them a call and ask. Under the Equal Credit Opportunity Act, you have 60 days to ask your lender why it rejected your application, and they must give you a specific reason for your denial.
Once you have that information, you can start to tackle that financial roadblock.
Here are a few ways to help improve your chances of getting approved for a loan the next time.
Getting rejected for a loan can be disheartening, but don’t let it get you down.
Use this setback as an opportunity to improve your financial standing. Take steps to boost your credit score, manage debt responsibly and explore alternative lenders if needed. Remember, it’s all about progress, not perfection.
Having bad credit doesn’t mean you’re out of the game, either. There are still ways to secure a loan, though it might come with a higher interest rate or less favorable terms.
Here are some options:
Yes, you can contest a decision if your loan application is denied. When you receive a loan denial, the lender is required to provide you with a written explanation on why. If you believe the lender made an error or there is incorrect information affecting the decision, you have the right to dispute it.
Yes, you can reapply for a loan after being denied. However, you should avoid rushing into another application right away. Multiple loan applications in a short period can negatively impact your credit score and may be a red flag to lenders. Instead, take some time to assess the reasons for your rejection and work on improving your creditworthiness.
Generally, it’s wise to wait at least three to six months before reapplying for a loan. This gives you time to make positive changes and increase your chances of approval.
Applying for a personal loan involves a hard inquiry on your credit report, and this can cause a slight dip in your credit score. However, the act of being denied for a loan itself does not hurt your credit score. Loan denials are not reported to the credit bureaus and do not have a direct impact on your credit score.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on retirement, investing, taxes and life insurance.
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