How to Avoid Being Rejected For a Loan

How to Avoid Being Rejected For a Loan

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated November 16, 2022

There are numerous reasons you can be rejected for a loan, from poor finances to minor application errors. No matter why you were rejected, the important thing is to stay positive and remember that consumers get rejected for loans all the time. Moreover, there are countless changes you can make to better your financial situation and ensure you get approved in the future. 

How To Avoid Being Rejected For A Loan? 

There are numerous reasons you can be rejected for a loan, but thankfully there are ways to avoid loan rejection. 

1. Get Pre-Qualified

Most lenders offer an online tool that shows you what loans you could get, based on some basic information you provide. The process won’t affect your credit score (lenders only perform soft credit checks) and you can choose to complete the loan application with the lender with the best offer. 

2. Check Your Credit

When you apply for a loan, your credit is one of the first things lenders will check. Every lender has different requirements, but having good credit makes it easier to qualify for a loan and a low-interest rate.

So, ask the lender about their credit requirements, then get a copy of your credit report and credit score from Equifax and TransUnion to see if your credit is high enough to meet their requirements. Just remember that you could still be rejected if you don’t pass the lender’s other requirements.      

3. Apply For A Lower Loan Amount

The higher the loan amount you borrow, the higher the risk is for the lender. As such, lenders may have more stringent requirements for higher loan amounts. If you apply for a loan that you can’t afford because your finances aren’t great, some lenders will reject your application. In that case, you might have better luck asking for a smaller loan that suits your income better.   

4. Improve Your Finances  

The most important thing for lenders is your ability to cover loan payments. Since a higher income lowers your debt-to-income ratio (DTI), you can avoid being rejected for a loan by asking for a raise, getting a second job or finding an extra source of cash, like a side hustle. 

You can also lower your DTI by reducing your debt loads. Some borrowers do this using the “snowball” effect, where you pay your smallest debts first and make minimum payments toward your larger debts in the meantime. The “avalanche” effect is the opposite; where you pay your largest and highest-interest debts first.

5. Reduce Risk For Your Lender 

If your income and credit aren’t good, your lender might consider you too risky. When that happens, consider offering some form of security. 

  • Apply for a secured loan – This involves offering collateral, like a cash deposit, car title or other asset. Something your lender can seize to recover their loss if you don’t pay back your loan. 
  • Add a co-signer – If you don’t have collateral, try finding a cosigner and applying for a guarantor loan. A co-signer/guarantor agrees to cover your payments when you can’t afford them. 

Common Reasons Why People Are Rejected For Loans

There are many common reasons why individuals are rejected for personal loans. While some reasons may be more complex than others, being aware of the reason is the first step to finding a solution. Here are some common reasons you may be rejected for a loan: 

  • Bad Credit – Having bad credit or no credit can often lead to a loan rejection, especially if it doesn’t meet the lender’s minimum credit score requirements. 
  • Low Income – If your income does not meet the lender’s minimum income requirements, it could lead to a loan rejection. 
  • Reason For Loan – Some lenders may have rules about how you can use the loan. If your purpose for the loan doesn’t fall within the lender’s requirements, then you may be rejected.
  • Loan Application Mistakes – Errors or inaccuracies in your application resulting in the lender being unable to verify your personal information may also lead to rejection.
  • High Debt – If you have too much debt that eats away at your available income, you may be rejected. Lenders want to ensure you have enough income left to add a new loan after paying your current debts and financial obligations.
  • Lender Requirements – You did not meet the other requirements of the lender such as age and residency.

What Can You Do If You’re Rejected For A Loan? 

If you get rejected for a loan, there are a few steps you can take, including: 

Step 1 – Find Out Why You Were Rejected

Start by contacting the lender and asking why your loan was denied. It may be due to a bad credit score, low income or a mistake on your application. Either way, you can figure out what happened and fix the issue.  

Step 2 – Review Your Credit And Finances 

If the rejection was because of your credit or finances, avoid applying for another loan until you review them. Then, check your credit report and credit score. A solid payment history and credit score of around 660 to 900 are ideal here. 

Next, clean up your finances by consolidating your debts, and build a savings fund. Doing all of this can help you qualify for the best possible loan conditions later on.    

Step 3 – Apply With A New Lender 

Once you’ve improved your finances, shop around and compare loans from multiple lenders. You’re not under any obligation, so take the time you need. Don’t apply until you’re 100% ready, because when a lender runs your credit, a hard inquiry will appear on your credit report which can hurt your credit score. 

What Is Loan Approval Based On?

Every lender has their own unique loan requirements. If you get rejected by one lender, it does not mean that you will never be eligible for a loan because every lender is different. Typically, lenders consider the following factors.

Credit Score, History, and Report

A high credit score and an exceptional credit history communicate to lenders that you are able to handle your finances effectively thereby making you an excellent loan candidate. Keep in mind that the opposite is true, a low credit score or limited credit history communicates to lenders that you may not be an ideal candidate, leading to possible rejection.

Employment History

Many lenders tend to be concerned about stable and consistent employment in their candidates. If you have irregular employment or sporadic history of employment, this can indicate that you may default on a loan as your income may not be stable enough to support loan payments.

Income and Expenses

If you have a lot of expenses compared to your income, the lender may perceive you as high risk because you’re more likely to default on payments. Your income should easily be able to cover your expenses plus future loan payments. Some lenders require a copy of your bank statements to understand your spending habits.

Down Payments

The higher your down payment is, the smaller your loan will be. Lenders prefer candidates who make large down payments because it reduces their risk since loan payments and interest will be lower. 

How To Improve Your Chances Of Getting Approved

Even though there is no way to 100% guarantee a personal loan will be approved, there are several steps you can take to better your odds. By understanding your finances and the lender’s requirements, you can figure out what you need to get approved for a loan.  

Check Your Credit For Errors

Look over your free credit report for errors and other details that may be flagged by a lender. Errors in your credit report can negatively affect your credit score. If you find an issue, dispute it with Equifax and TransUnion. 

Compare Your Credit Score To Lender Requirements

Take note of what your actual score is, a good credit score is considered to be 660 or higher. Reach out to lenders about their credit score requirements. Using the lender’s information, you can evaluate your credit score against their requirements to determine why you were rejected and what you need to improve on for the future.

Add Collateral

Providing collateral to back up your loan could improve your chances of getting approved because it adds an extra layer of protection for your lender. Make sure you compare the asset you intend to use to secure a loan against the lender’s requirements for collateral.

Put Up A High Down Payment

If you can, make a higher down payment on the asset related to the loan you are applying for because it will reduce the lender’s risk in various ways. It‘s likely that your lender has minimum requirements for down payments, so ensure you meet the requirements at the very least.

Other Ways To Improve Loan Approval

Other things you can do to increase your odds of getting approved include:

  • Figuring out all the reasons you were denied for a loan from a lender in the past
  • Review your application for personal information errors before your loan application submission
  • Limit the number of loan applications you submit to prevent your credit score from dropping
  • If you have no credit history or extremely poor credit, consider applying for a secured credit card designed to build credit
  • Apply for a loan with a different lender
  • Check if your loan purpose and funds usage are allowed by your lender

Loan Rejection FAQs

How soon can you apply for a loan after being denied?  

If it’s with the same lender, you normally have to wait around 60 – 90 days. However, every lender has a different time frame for this, so make sure to ask them about it, then improve your finances and credit before you apply again.    

What happens if my loan is denied a second time?

Once again, contact your lender and ask why your application was rejected. Getting denied could be due to a number of things, including an error on your credit report or a low credit score, so try to meet your lender’s exact requirements or find another lender.    

Why would you get denied after pre-approval?

Pre-approval isn’t the same as approval. It’s a service that shows the loans they can offer you, following further verification. If your pre-approval gets rejected, it’s generally because your finances aren’t good enough or you didn’t fill out your forms properly.  

Bottom Line

Whether you’ve been rejected before or are looking to apply for your first personal loan, Loans Canada can help you get approved for the loan you need. Fill out an application today!

Rating of 5/5 based on 4 votes.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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