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It can be disheartening to have your loan application declined; however, it does not need to be a hopeless situation. If your loan application has been declined, we help you assess why that was and what are the possible next steps.

What happens if you are not approved for a loan?

If you are not approved for a loan, you will receive an ‘adverse action letter’ from the lender; this letter will explain why your loan application was rejected.

You are legally entitled to a copy of your credit report, at no cost to you, if a loan application has been denied. In addition to the letter, your lender should also share instructions on how you can request this free report from the lender’s credit reporting company. If you do not receive these instructions, you can also request the report directly from the credit reporting agency; the details of the agency will be provided on your declination letter.

Why might my loan application have been declined?

There are different reasons why your loan application may have been declined. However, the most common reasons are the following:

You entered your information incorrectly

Incorrectly entering your details, such as your address or even a spelling error, is a careless mistake that could cost you your loan approval. To avoid frustration and disappointment, before applying for a loan, always triple-check that the information you have provided is correct and accurately written.

Similarly, if a lender is unable to verify your identity, you will not be approved for a loan. This may be the case if you are not registered to vote; lenders often use the electoral roll to verify your name and address.

You have poor or no credit history

The majority of lenders will use credit history and credit score as a means of assessing a borrower’s creditworthiness. If you have a history of missed or late payments or maxed out credit cards, lenders may view you as a risky borrower and therefore will be less inclined to approve your loan.

Additionally, if you have no credit history, it may be hard to be approved for a loan. This is because there is no past data to demonstrate whether or not you are a reliable borrower.

You have too many credit applications

If you have applied for numerous forms of credit over a short amount of time, you could be refused for a loan. This is because multiple credit applications imply that you are in a poor financial situation and are constantly seeking to borrow funds. For lenders, this is a red flag as it highlights that you struggle to effectively manage your money.

You are unemployed or your income is too low

The majority of lenders will have a minimum income threshold that you will need to meet in order to qualify for a loan. If you do not meet the criteria, your application will automatically be declined.

Similarly, if you are unable to demonstrate stable employment, it is less likely that you will be approved for a loan. This may be the case if you are self-employed or a contract worker. Anything that demonstrates unstable employment will indicate to lenders that you are a high risk candidate.

You are linked financially to someone with bad credit

Even if you yourself do not have a bad credit score, if in the past you have applied for credit jointly with someone else, and they have a poor credit record, this association will be recorded on your record and could prevent your chances of loan approval.

Can I apply for a loan after a loan application is declined?

It is possible to apply for a loan after your application has been declined; however, it is worth waiting to reapply and trying to improve your credit score in the meantime. That way, you are less likely to be declined a second time. If you review why your application was declined the first time, this can help you prepare to reapply.

How is my credit impacted if my loan application is declined?

If you are rejected for a loan, it will only slightly impact your credit score (roughly 5 points). Being denied for a loan will also appear on your credit history which may deter future lenders or credit companies from approving your loan. Although the impact decreases over time, the inquiry will still remain on your credit report over the next two years.

What should you do after your loan application has been declined?

There are a few actions you can take if you have been refused a loan.

Speak to your lender – your lender can help you to understand why your loan was declined and how you might fix any problems before reapplying

Review your credit report – if your loan was rejected for poor credit rating, you should check your credit history to make sure that there are no errors. If there are mistakes, agencies have a 28-day window to investigate. On the off chance that there are indeed errors, you can write a ‘notice of correction’ to explain why you think a detail may be wrong. Or, if there are any missing payments caused by extraneous circumstances, this is an opportunity to address this.

Check your connections – if you are linked to someone with a bad credit history, it can have a hugely negative impact on your loan applications. This may be that your name appears on a bill or you have shared an address with someone with bad credit, be it an ex-housemate, family member or former partner. If this is the case, you can have past financial links removed from your credit report by filing a ‘notice of disassociation’ and proving that there is no existing financial association anymore.

Wait to reapply – it can be frustrating but after being refused a loan, the best thing to do is to wait a while before reapplying. Everytime you apply for a loan, lenders carry out a hard credit check which will leave a marker in your credit history. The more of these there are, the worse it looks to lenders. Financial experts recommend a minimum of six months before reapplying for any type of credit.

Build credit – in the waiting time before reapplying for another loan, it is a great opportunity to build your credit rating. All of this will help improve your future chances of loan approval and may also mean you get loans at more favourable rates. Building credit includes things like registering on the electoral roll, checking for errors and paying debts on time.

Richard Allan

Richard Allan

Richard Allan is the founder of Capital Bean and a passionate writer about personal finance, budgeting and how to save money at home and work.

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