Loan application denied? Here’s what to do next.

Getting declined for a loan can be a surprise. But it happens more often than you might think. Forty-eight percent of applicants have had at least one loan application rejected, according to a recent survey. But a loan denial doesn’t have to define your financial future. In fact, the feedback you get on your application can help you learn.

Let’s find out why a loan application could get turned down and get some tips for applying next time.

Some reasons lenders could turn down a loan application

Your credit score needs a boost.

• What it means: Your credit score can show how well you’ve paid bills and managed debt. Lenders use it as a snapshot of your reliability and how likely you are to repay.
• Why it matters: Lenders typically have credit score limits that specify how low a credit score they will approve. It often isn’t the only information they use in their decision, but it can play an important role.
• What you can do: Focus on consistently making payments on time, keep balances under 30% of your credit limit (the total amount of credit you have), and check your credit report for any errors.

Your debt outweighs your income.

• What it means: The amount you earn and the amount you owe determine how comfortably you can afford another payment.
• Why it matters: Lenders are more likely to let you borrow if you’re not already spending too much of your income on existing loans or credit.
• What you can do: Try paying off smaller debts first or refinancing loans to lower your monthly payments. Even small changes can help make your debt-to-income ratio look more appealing to lenders.

The amount you want to borrow is too large.

• What it means: Your earnings aren’t enough to repay the loan amount you’re requesting.
• Why it matters: Lenders want to make sure borrowers can make monthly payments consistently.
• What you can do: Consider applying for a smaller loan with more manageable payments. This might mean you need to save up for a larger downpayment toward your purchase before taking out a loan.

Your credit history actually doesn’t have enough history.

• What it means: Your credit history shows lenders your repayment habits. If you haven’t been using credit for long, lenders might determine they do not have enough information about your habits to confidently lend you money.
• Why it matters: Lenders feel more secure about lending if they have enough data to help them determine whether you can manage the loan responsibly.
• What you can do: Sign up for a credit card. Use credit sparingly and pay it in full each month to help build a solid history. This will take time. Keep any credit card balances low so that you don’t hurt your overall ability to borrow.

Your loan application had errors or was missing some info.

• What it means: Your loan application tells lenders key information including who you are, where you work, and how much you earn.
• Why it matters: Lenders rely on accurate, complete data about you and your finances to make responsible lending decisions. Even a small typo can put a red flag on an application.
• What you can do: Review your application carefully before submitting it to confirm that the finances you’re reporting matches your employment or tax records and to confirm that your personal info is correct. The extra time this takes is worth it to help reduce feelings of stress and increase your confidence.

Your employment or income doesn’t seem consistent.

• What it means: Lenders want to know that you’re steadily earning income.
• Why it matters: Predictable, dependable monthly income makes lenders more confident that a borrower can repay a loan responsibly.
• What you can do: Provide multiple recent pay stubs or tax returns to help show consistency. Detailed invoices or contracts can help if you’re self-employed.

You have recent missed payments.

• What it means: Late payments and delinquencies on existing borrower accounts are usually a red flag for lenders.
• Why it matters: Staying on top of payments helps keep your credit score up and shows responsible habits.
• What you can do: Bring any delinquent accounts up to date. You can also set up automatic payments, or you can set payment reminders on your phone or mark them on a calendar. Consistently making payments on time matters.

What to do if your loan application is rejected

The news of a loan denial sometimes hits hard, but it can be a chance to learn ways to improve your financial health overall. These steps can help you learn from the experience and prepare for the future with confidence:

1. Take a breath and reflect. Frustration is natural. Give yourself time to reset.
2. Read your loan denial letter. Knowing why you were denied helps determine where to focus your efforts. Lenders are generally required by law to provide the reasons, so if the letter does not specify, you have the right to request them within 60 days of denial.
3. Check your credit report. Errors can harm you, so get a free report and work on fixing any mistakes.
4. Look for loans that offer preapprovals. Some loans show your approval chances without impacting your credit so you can test the waters.
5. Get a cosigner. If you feel comfortable asking a loved one or trusted friend to cosign a loan, having them do so could help make approval easier next time. Make sure you’re both prepared for repayment responsibility before they agree to help.

Small steps count — and each one can help take you closer to your next loan approval. Stay curious about your finances, use what you learn to guide your next steps, and keep learning.