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You applied for a loan and your application was denied.  And now, you are left wondering why. Here are six common reasons loan applications get rejected, and steps you can take to make yourself more likely to be approved for your next loan.

  1. Your credit score is too low

Your credit score, also called a FICO score, is that 3-digit number that estimates what kind of risk you represent to lenders, insurance companies, and even prospective employers. Things that make your credit score low are poor debt payment history, debt sent to collections, charged-off debts, bankruptcies and foreclosures, a judgement, high and maxed-out credit card balances, too many credit applications submitted, and even closing credit card accounts.

What to do?  It will take a bit of time and work, but begin cleaning up the items on your credit report that make your score low.  Begin paying loan and credit card payments on time.  If you had debt charged off, pay it back.  Pay down your revolving credit card debt – in fact, try to pay it off each month.  Refrain from applying for loans at many different places.

  1. You don’t have enough credit history

It’s a catch 22 situation – you want to establish credit but lenders won’t lend you money because you haven’t borrowed before.  This is a common problem faced by young people and those who haven’t used credit for a long time.

What to do?  Consider a secured credit card or a secured loan, which requires you make a cash deposit, and that becomes your credit limit. If you haven’t used credit for a long time and still have a credit card, begin using it again.  You might also become an authorized user on someone else’s card. The payment history for that account will also appear on your credit record.  Finally, you can get someone else to co-sign for a loan to make a purchase.  Your payment history will build credit and the lender will feel secure.

  1. You don’t have enough income/have too much debt.

Your debt-to-income ratio might be too high. Your debt-to-income ratio is the portion of your income that goes to debt payment, and it is a key component of creditworthiness. If you add all your monthly loan payments and divide by your monthly income, and the ratio is over 36%, this may prevent you from being approved.

What to do?  Increase your income and/or reduce the total amount of debt you carry.

  1. Your job status isn’t stable.

One if the sections on a loan application is employment history.  Being unemployed is a signal to lenders that you cannot pay back the debt.  Switching jobs frequently may also indicate risk.  And if you’ve been in your current job for a short period of time, you may be denied.

What to do?  Get a job and unless you have a good reason for leaving, keep it as long as possible.

  1. There are errors on your credit report

Mistakes happen.  If you have errors on your credit report, they may be the cause of your loan denial.

What to do?  Before you even apply for a loan, check your credit report for inaccuracies.  If you find any, write to the credit reporting company explaining your dispute.  You can find more information about disputing credit report errors here.

  1. There are errors on the loan application

If your loan application doesn’t match up with your credit report, or any other data verification, you will likely be rejected.

What to do?  Before you submit your application, check all your information to make sure it is correct.  Simple things like mistyped addresses and phone numbers may trip you up.

If your loan application is denied, the Fair Credit Reporting Act requires the lender to tell you why you were denied, as well as the name, address, and phone number of the agency that provided the information used to deny the loan.  This same regulation allows you to get a free copy of your credit report once a year from each credit reporting agency.  Go here to find out how to get your credit report copy.


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