4 steps you can take after being denied a personal loan
Don’t let a personal loan rejection bring you down. Take these steps toward improving your credit history and then re-apply for a personal loan.
Getting denied for a personal loan can take a toll on your emotional and financial state.
Rather than accepting the rejection, take action to learn more about your financial situation and why you were denied for the loan. Taking the time to understand will allow you to work toward a successful application next time you apply for a loan.
1. Find out why you were denied for the loan.
If you contact the lender, you’ll be provided with an explanation of why you were denied for a loan. That explanation will be useful in determining what went wrong for you. One common reason is having a poor credit score.
However, a personal loan is not always denied because of a poor credit history. Other common issues include:
- Errors in your credit report. Inaccuracies of reported late payments and closed accounts can negatively affect your credit score. Review your credit report for any errors. If you discover a problem, dispute it with the two credit bureaux in Canada: Equifax and TransUnion.
- Limited credit history. If you don’t have a credit history, lenders are more likely to deny your request for a personal loan. To build your credit score, consider applying for a secured credit card designed for people with poor or no credit.
- Incorrect information on your application. Something as simple as entering your driver’s licence number incorrectly or misspelling your residential address could mean the credit card issuer is unable to verify your details and move forward with the approval process. Double check all of your information before submitting the application.
- Perceived high financial risk. If you have a lot of expenses in comparison to your income, a lender may determine that you’re at risk of defaulting on payments.
- Did not meet basic requirements. Most personal loans come with age, minimum annual income, residency and other requirements. Don’t apply for a loan if you don’t meet the requirements.
2. Order a copy of your credit report.
Your credit score forms the backbone of your overall credit history. This summary of your borrowing history is how lenders determine whether you’re a good investment choice and can pay off your loan balance each month.
Before you re-apply for a loan, you should order and examine your credit report for accuracy. You can receive a copy of your credit report from one of the two credit bureaus in Canada:
- You’ll need to provide your full name, contact information, Social Insurance Number and date of birth in order to receive your report.
- When examining your credit report, look for any errors.
You may find that it shows you owe money on an account you’ve since paid off, or have open credit cards you’ve never even owned. Even small errors and typos can affect how a lender scores your default risk. Document these errors and dispute them with each of the credit bureaux.
Why are credit scores important?
Higher credit scores can open up new opportunities for you financially, especially if you are looking to borrow money or save on interest rates and fees. Your credit history shows lenders and creditors that you can handle your finances intelligently. Good credit scores of 650 or more show lenders that you’ve successfully managed and paid off debt in the past, making you a good candidate for borrowing money.
The main influences on your credit score are your payment history, your total debt, the average age of your credit accounts and the number and types of credit accounts that you have.
- Be aware that each of the two credit bureaux uses proprietary algorithms when crunching the numbers in your report. This means that no two lenders will review your credit report in exactly the same way.
- Carefully review your credit history annually to stay on top of making sure that lenders are seeing only the most accurate picture of your financial situation.
3. Try a different lender.
Requirements and eligibility criteria can vary between different lenders. You always have the option of researching other lenders for a personal loan that could meet your needs. However, you’ll want to limit how many times you re-apply for a loan before addressing the issues that underlie your loan denial.
Each time you apply for a loan, the lender will conduct what’s called a “hard pull” on your credit score, potentially affecting your credit score by about 5 points for a year. If you continuously apply and are denied for loans, you could end up lowering your overall credit score substantially since lenders will be looking into your credit score each time.
4. Take some time to address your finances.
As mentioned above, each time you apply for a loan, the lender will conduct a “hard pull” on your credit score, negatively affecting your score by about 5 points. If you continuously apply and are denied for loans, you could further lower your overall credit score.
- Consider waiting before attempting to apply for another personal loan. With time on your side, you can work to improve your financial situation by paying down your debts, or addressing the structural issues of your finances – which can increase your chance of approval in the future.
How can I improve my credit score?
- Create a solid budget. Take a deep look into your finances to understand how you might be able to lower your debt-to-income ratio and overall debts. Create a monthly budget and try to stick to it.
- Make all payments on time. If you successfully continue to make bill payments on time, you’ll not only avoid late fees, but lenders will also see that you can successfully manage your finances.
- Hold off on opening new accounts. Successfully using and paying off your credit cards and loans can positively affect your credit score, but too many can signal to a lender that you’re having financial hardships.
Don’t let a denied application for a personal loan discourage you. Do your research and plan your finances accordingly to improve your credit score and fix any underlying issues. Doing so will only help to improve your chances of being approved for a loan.
If you need to move high-interest debt, a balance transfer could be a reasonable option.