How to Recover from a Rejected Loan Application

If you've applied for a loan and it has been turned down, not only can this put a stop to the money you needed, it might also be an indication that your credit score isn’t as good as you thought. This might preclude you from getting a loan now or in the future.

Recover from rejected loan application

You might not know where to turn or what you should do next. However, when you are denied credit based on the information in your credit report, lenders are required to mail you an Adverse Action Notice.

As a first step, don’t toss the notice in the trash. You should read it thoroughly and understand why your loan application was rejected. Turn this situation to your advantage by using this information to develop a plan of action to help you become more credit-worthy in the future.

Address Issues on Your Credit Report

You should check your credit reports, from all three national credit bureaus, at least once a year. You are allowed to receive a free credit report from the three national credit bureaus once every 12 months, so take advantage of reviewing what’s on your credit report.[1] Being proactive will give you a chance to correct or address any errors. Review your credit reports and look for incorrect information. If you find incorrect information, there is a process you can follow to report it to each of the credit bureaus. Also, use the credit reports to review your payment histories to understand some of the mistakes you have made in the past and strive to not make those same mistakes again. It would be a good idea to check your credit reports before you apply for a loan.

Pay Down Outstanding Debt Balances

Most lenders review potential borrowers debt-to-income ratio, so paying down debt would generate a favorable lower ratio. Debt-to-income ratio typically divides your monthly debt obligations by your monthly gross income. This number lets lenders determine how much additional debt you can afford to take on. If you are denied a loan for this reason, lenders may not be fully confident that you’ll be able to make your minimum payments. You can use an online debt-to-income ratio calculator to get a good idea of what lenders view.

Reasons loan denied

Common Reasons Your Loan Was Denied

The most common reasons for a loan being denied are:

  1. Bad or no credit: Lenders typically look at your borrowing history, usually in the form of your credit scores, when you apply for a loan. Lenders would like to see a positive history of borrowing and repaying loans. However, you might not have borrowed much, or you might have experienced challenges repaying or defaulted on loans in the past.
  2. Not enough income: Lenders want to feel comfortable that you’re able to make the minimum monthly payments before they approve your loan. This is why lenders that lend to those with bad credit may charge a higher interest rate. Many lenders use a debt to income ratio to determine if you can handle the payments if your loan is approved. They compare how much you earn each month to your debt repayment amount, assuming minimum payments. If it doesn’t look like you’ll be able to afford the new debt, they will likely reject your application.
  3. Other issues: There might also be occasions when you’ll be declined for other reasons. For example, it could be something as simple as entering a wrong birth date or paycheck amount by mistake.

When Should You Apply For A Loan Again?

Unfortunately, there is no definite answer for this one. It is suggested that before you apply for a loan again, you should make sure you have done as much as you can to improve your credit score. 

If you are able to take out a new loan, make sure you don't borrow more than you can afford to repay and most importantly always pay on time. This may help demonstrate to lenders that you have now learned to manage your money responsibly.


[1] During the COVID-19 pandemic, the three national credit bureaus, TransUnion and Equifax, are offering all U.S. consumers free weekly online credit reports through April 20, 2021.

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