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- Common reasons why your loan was denied<\/a><\/li>\n
- Building your credit before applying again<\/a><\/li>\n
- Getting a loan when you have bad credit<\/a><\/li>\n
- How to improve your chances of getting a loan<\/a><\/li>\n
- Getting denied doesn\u2019t hurt your credit score<\/a><\/li>\n<\/ul>\n
<\/a><\/p>\n
Common reasons why your loan was denied<\/h2>\n
Two main factors generally cause lenders to deny an application \u2014 credit score and income.<\/p>\n
Credit score<\/h3>\n
If a lender sees too many red flags when it reviews your credit history, it might consider you too risky as a borrower<\/a>. These credit score<\/a> factors can negatively affect your credit:<\/p>\n
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- Bankruptcy \u2014<\/b> A bankruptcy <\/a>within the last 10 years can have a negative impact on your credit score. Depending on the type of bankruptcy you filed, it can stay on your credit reports for up to 10 years. During that time, it may be very difficult to qualify for any kind of new financing, including a loan.<\/li>\n
- Foreclosure \u2014 <\/b>A foreclosure can also be concerning for lenders when you\u2019re trying to qualify for a loan. A foreclosure indicates to lenders that you\u2019ve had trouble managing a loan in the past \u2014 and could make them wary to lend to you again.<\/li>\n
- Open collection accounts \u2014 <\/b>If you have an open collection account, this means it\u2019s been sent to a collections agency but remains unpaid. This can hurt your credit score until you pay the debt in full, and having open collection accounts can also hurt your chances of getting a loan.<\/li>\n
- Late payments \u2014<\/b> Late payments affect your credit because your payment history carries a lot of weight (35%) in determining your credit score. Qualifying for a loan is much more challenging with a history of late payments.<\/li>\n
- High credit card balances \u2014<\/b> Your credit utilization ratio, or how much debt you have compared to your available credit, plays a big part in determining your eligibility for a loan. High credit card balances could mean you have trouble paying down your current debt \u2014 and might have trouble paying off new debt.<\/li>\n
- Too many recent credit inquiries \u2014<\/b> Each time you apply for credit, the lender will likely do a hard credit pull, which can cause a temporary dip in your credit score. Too many recent inquiries in a short period of time could signal to lenders that you\u2019re planning to take on new debt or are experiencing cash flow problems. This could make lenders think you\u2019re at greater risk for non-payment of your loan.<\/li>\n
- Short credit history \u2014 <\/b>A long and positive credit history shows lenders that you repay your loans on time. A brief credit history, or no credit history, doesn\u2019t give lenders enough information to determine whether or not you\u2019re likely to repay your loan. This can affect your eligibility to qualify for a loan.<\/li>\n<\/ul>\n
If you\u2019re not sure where your credit stands, you can request a free copy of your credit report from the three main credit bureaus \u2014 Equifax, Experian, and TransUnion \u2014 from AnnualCreditReport.com.<\/p>\n
Income<\/h3>\n
If you were denied a loan based on your income, it\u2019s likely due to your debt-to-income ratio being too high.<\/p>\n
Your DTI ratio is all your monthly bill payments divided by your gross monthly income. Although this isn\u2019t necessarily your fault, as amounts owed can increase faster with inflation than wages, lenders still use your DTI to determine your ability to repay what you plan to borrow.<\/p>\n
For example:<\/b> Say you earn $3,500 per month and have the following monthly debt payments:<\/p>\n- \n
- Mortgage: <\/b>$1,500<\/li>\n
- Car loan:<\/b> $400<\/li>\n
- Student loans: <\/b>$300<\/li>\n
- Credit cards:<\/b> $250<\/li>\n<\/ul>\n
Your total monthly debts equal $2,450, giving you a DTI of 70%. <\/div><\/div>\n
Most lenders prefer a DTI ratio no greater than 36% when qualifying for a loan. You can lower your DTI by focusing on paying down some of your debts, reviewing your spending to see where you can cut expenses, and not taking on any additional debt payments.<\/p>\n
Keep reading:<\/b> What Is Your Debt-to-Income Ratio? How to Calculate DTI<\/a><\/p>\n
Other reasons your loan application may have been denied<\/h3>\n
Besides your credit and income, several other factors may cause a lender to reject your loan application, including:<\/p>\n
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- Employment history \u2014<\/b> Lenders look at how long you\u2019ve been with one employer when offering loans. Gaps in employment can also raise questions.<\/li>\n
- Cash flow and liquidity \u2014<\/b> Liquidity and cash flow is how easily you have access to ready cash. If all your money is tied up in assets rather than easily accessible, it could cause a lender to deny your application.<\/li>\n
- Length of time at current residence \u2014<\/b> Moving frequently can be expensive. Closing costs, down payments, and paying a new mortgage all add up. Living in the same place makes you a reasonable credit risk as it shows you can make your monthly payments.<\/li>\n
- Changing your phone number frequently \u2014<\/b> Not changing your cellphone number frequently could indicate a higher level of stability to lenders.<\/li>\n<\/ul>\n
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Building your credit before applying again<\/h2>\n
If you\u2019ve been turned down for a loan, here are some things you can to do help build your credit before you apply again:<\/p>\n
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- Check your credit reports. <\/b>The Consumer Financial Protection Bureau recommends you check your credit report every 12 months, at a minimum. Before applying for credit again, it\u2019s good to keep an eye out for any possible errors or suspicious activity on your credit report and dispute anything that seems incorrect.<\/li>\n
- Keep credit card balances low. <\/b>Your credit utilization ratio is how much you currently owe in revolving credit divided by your credit limit. It\u2019s usually shown as a percentage and is an important factor affecting your credit score, as high credit balances can hurt your credit utilization.<\/li>\n
- Make monthly payments on time. <\/b>Making on-time payments does the most to boost your credit score. Making late payments hurts your score significantly.<\/li>\n
- Avoid multiple hard inquiries. <\/b>Each time you apply for credit, the lender will likely do a hard credit pull. Multiple hard credit inquiries in a short time period can be a red flag. For that reason, you should avoid applying for multiple loans after being denied the first time.<\/li>\n<\/ul>\n
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Getting a loan when you have bad credit<\/h2>\n
- Keep credit card balances low. <\/b>Your credit utilization ratio is how much you currently owe in revolving credit divided by your credit limit. It\u2019s usually shown as a percentage and is an important factor affecting your credit score, as high credit balances can hurt your credit utilization.<\/li>\n
- Cash flow and liquidity \u2014<\/b> Liquidity and cash flow is how easily you have access to ready cash. If all your money is tied up in assets rather than easily accessible, it could cause a lender to deny your application.<\/li>\n
- Car loan:<\/b> $400<\/li>\n
- Foreclosure \u2014 <\/b>A foreclosure can also be concerning for lenders when you\u2019re trying to qualify for a loan. A foreclosure indicates to lenders that you\u2019ve had trouble managing a loan in the past \u2014 and could make them wary to lend to you again.<\/li>\n
- Building your credit before applying again<\/a><\/li>\n
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