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What to Do If Your Loan Application Was Declined

October 12, 2023 4 mins

You finally decided to go for it. Whether you’re making a big-ticket purchase, getting a new car, or buying a house, you probably need to apply for a loan. But what happens if your loan application gets denied? While it may mean your plans are on hold, at least temporarily, it’s not a reason to panic.

Financial institutions decline loan applications all the time. The good news is, they have to tell you why you were denied. Here’s what to do if your credit application was denied, such as for a personal loan, a car loan, a mortgage, home equity line of credit (HELOC) or other loan or line of credit.

1. Find out why you were declined

Before you do anything else, figure out why your loan application was denied. Lenders are required to send an adverse action notice—a disclosure that explains why you didn’t receive approval—within 30 to 90 days of a credit denial.

Common reasons for loan denial include:

  • an incomplete application
  • incorrect information on an application
  • insufficient income
  • unverifiable employment
  • limited or no credit
  • a low credit score
  • delinquent accounts
  • foreclosures or repossessions
  • a frozen credit report
  • bankruptcy

If you were turned down because of something in your credit report, the adverse action notice will inform you what the issue was and will provide the name of the reporting credit bureau.

2. Check your credit report

You’re eligible for a free copy of your credit report if your application was denied. (In fact, anyone in the US can request a free credit report each week.) It’s important to review it: In a recent Consumer Reports study, 34 percent of consumers surveyed found at least one error in their credit report1. Common issues include:

  • someone else’s account information
  • on-time payments flagged for being late
  • closed accounts reported as active
  • discharged account information
  • signs of identity theft, such as unfamiliar accounts, purchases you didn’t make, and credit applications you didn’t submit

You can report or dispute any errors and inaccuracies to the credit bureau.

3. Fix your credit score

If your credit report is accurate, then you’ll need to improve your credit score. One way to do that is to get caught up on any late payments you may have and continue to make your payments on time—late payments can stick to your credit file for up to seven years.

There are also products that can help you rebuild your credit by increasing your score. Check out our ScoreUp Loan and our secured credit card, or talk to us to learn more about other ways to rebuild your credit.

4. Pay down your debt

If your credit balances are high compared to your income, you should start paying down your debt as quickly as possible. If your current earnings don’t support that, save on gas, groceries, and utilities; make money at home; or look for ways to tighten your budget.

Applying for a lot of credit cards, personal loans, car loans, home loans, and business loans in a short amount of time can hurt your credit score and, even worse, make it look like you’re in financial trouble.”

5. Lower your credit card balances

Maxed-out credit cards aren’t doing you any favors. Get all your balances below 30 percent of each card’s limit to give your score some TLC.

Need some help paying down that debt? Here are some ways to pay off your credit cards.

6. Cut back on your applications

Applying for a lot of credit cards, personal loans, car loans, home loans, and business loans in a short amount of time can hurt your credit score and, even worse, make it look like you’re in financial trouble. Stick to applications that you need and apply for your loan again in a few months.

7. Build a credit history

If you haven’t borrowed before, you may need to build your credit. One way to establish credit is to become an authorized user on your spouse or a parent’s credit card. They’ll need to have good credit and a good payment history, and it’s even better if they’ve had the account for a long time.

You can also try a secured credit card, which lets you borrow against a refundable security deposit. Make your payments on time and your credit score will go up each month.

8. Apply with a cosigner

If you’re establishing a good credit history or dealing with some financial setbacks, a cosigner or co-borrower may be key to getting approved for your loan. Even better, if your cosigner has good credit, you might lock in a better rate, a bigger loan amount, or both.

9. Apply for less

Your chances of approval might improve if you apply for a smaller loan amount. While this may mean scaling back on your plans for that big purchase, you’ll be able to pay down a smaller loan much faster. (Some lenders, including Patelco, will automatically offer a lower amount that you may qualify for, on certain loan applications.)

10. Talk to the experts

Make sure you’ve explored all your options — and get personalized advice for your situation — with one of our Certified Financial Specialists. Schedule an appointment for a free financial checkup and learn how you can reach your goals sooner.

1 Consumer Reports, “Disputing Errors on Your Credit Reports”

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