Ever considered what happens if you’re not approved for a loan? Lenders offer terms and conditions for auto loans and other debts based on credit reports. Sadly, bad credit may get your personal loan rejected.
Thankfully, you can simply improve your score then apply for another loan. Keep reading to learn more about the effects of loan application rejections and what to do next.
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Can You Get Denied from a Personal Loan?
Financial institutions use credit scores in order to determine who is more likely to repay their loans. Of course, lenders want borrowers to repay their loans on time. In response, credit bureaus designed credit scoring models that will assign ratings for borrowers.
It considers several factors including credit history, debt-to-income ratio, and credit utilization.
Creditors also give out loan offers based on peoples’ credit scores. Those with excellent credit receive the lowest rates of interest and other favorable loan terms. On the other hand, people with poor credit get unappealing offers. At worst, lenders may simply reject personal loan applications altogether.
Reasons for Denying Loans
There are a few reasons why a bank may decline loan applications. Usually, borrowers have bad credit scores that discourage banks from handing them loans.
They may also lack enough credit history, earn insufficient income, or hold excessive debts. Sometimes, it may simply be an error in a borrower’s loan application or credit report.
Poor Credit Score
First, you can get your personal loan rejected if you have a bad credit score. They may have been late on several loan payments for too long. This tarnishes their payment history and heightens their credit utilization.
These are the two most important factors in most credit scoring systems, so they have a huge impact on your score.
Insufficient Credit History
You could have a limited credit history that discourages creditors from approving your loan. Lenders need a sufficiently long credit history in order to verify an applicant’s debt management.
If it’s too brief, the record may have only a few balances, so a lender can’t gauge how well you handle loans. This is a common dilemma among young people and infrequent borrowers.
Lacking Income or Overwhelming Debt
If you earn a meager salary, your lender may be discouraged from approving your loan. If a borrower earns too little, he might find it difficult to repay on time.
In addition, lenders can choose not to give you a loan if you already have too many. If you can’t pay your existing loans, they could be reluctant to grant you another.
Credit Report or Loan Application Error
Your credit report can sometimes contain mistakes that could disrupt your loan application. These errors can dissuade lenders from giving you a loan. What’s more, your loan application can contain errors itself, such as wrong or misspelled info.
Those mistakes may delay your loan application since you’ll have to repeat it.
Does Being Refused a Loan Affect Your Credit Rating?
If you got your personal loan rejected, it won’t affect your credit score. However, a loan application could negatively impact your rating. We’ve mentioned that lenders determine a borrower’s loan terms based on their credit report.
This is typically considered a hard credit inquiry, meaning it deducts from credit scores.
What Do I Do if I Can’t Get Approved for a Loan?
Fortunately, you can respond to loan rejection in several ways.
First, you should take the time to raise your credit score by improving related factors. Then, scan your credit report for errors, and report it to your credit bureau.
These measures will boost your eligibility for loans, helping you reapply for better options.
Boost Your Credit Score
Credit scores mainly improve due to on-time payments, so you should focus on those for a few months. The goal is to build a record of diligent payments that will improve your credit history. It’s the main component of credit scores, occupying 35% of the FICO scoring model.
Pay your monthly installments punctually for a while, and you may find your credit score higher than before.
In addition, you might want to lower the amount you owe since it also takes a huge chunk of your credit. It’s also referred to as credit utilization, and the FICO scoring system rates it at 30%. It’s the ratio between the amount you owe and your credit limit, and it generally should be kept below 30%.
You can also pay debts off to lessen them, or you could also expand your credit limit.
Dispute Credit Report Errors
If you got your personal loan rejected, you might want to check your credit report. It’s counted as a soft credit inquiry, meaning it won’t harm your credit further. It’s also quite convenient since you can get free credit reports online.
Compare your free copy with their record to find out if there is mismatched information.
Be aware that you have the right to inquire regarding your loan rejection within 60 days. The Equal Credit Opportunity Act (ECOA). Your lender must inform you why your loan application was denied, and they must also provide the credit report you submitted.
Furthermore, creditors must explain how you may amend your report.
Consider Alternative Loans
You can take out loan amounts from other sources, so make sure to check beyond your current lender. Even better, you could find other choices that have superior terms, such as lesser origination fees and prepayment penalties.
Some banks and credit unions even require fewer business days for applications.
After improving your credit score and correcting your report, you’ll have an easier time finding new loans. Lenders will find your application more attractive, so they may offer better terms and conditions. You may find your monthly payments more convenient throughout the life of the loan.
Check your rates before, and you may receive better ones with your improved credit.