You apply for a loan for the very first time. You’re excited but also anxious because you will use the loan proceeds for your kids’ tuition fee. You immediately fill out the application online, submit the requirements, and hit the send button.
After a few hours, you received a text message. It was the lending company. And sadly, your application got rejected. You sit in a corner and ask yourself, “Should I reapply, or maybe I should wait a little while?”
Before jumping to your next step, you might want to chill, sip a cup of coffee and start doing below tips.
Identify the Cause of Rejection
The most important thing you should do is find out why your loan was declined. All lenders are mandated to disclose the reasons for rejection, so you are not blinded and make necessary adjustments. Below are the most common reasons:
- Insufficient or Unverifiable Income – Your lender reviews your work background, business, investments, and other sources of income before approving your loan application. This is to ensure that you can meet the monthly minimum payment. Other loans, such as home loans, require calculating your “ability to repay.” If the lender thinks that your source of income is insufficient to pay back the loan, they won’t approve it. In some cases, lenders may have difficulty verifying your income source. Because of that, you need to submit clear and concise requirements/documents.
- Bad/ No Credit – Lenders look at your credit history to assess how you are likely to pay your loan. They want to see a solid borrowing/ repayment history. If you’re in the habit of paying your loans after your due date or defaulting loans in the past, that would negatively affect your record and may be the reason to reject your application.
- High Debt-to-Income Ratio – Debt-to-income (DTI) ratio is the percentage of your gross monthly income relative to your loan. Lenders use this to determine your borrowing risk — if you can handle the payment upon loan approval. A lower debt-to-income ratio shows a good balance between debt and income, while higher DTI signals that you have too much debt relative to your income.
- Other Reasons – Other reasons for your rejection might be incorrect, incomplete or inconsistent details, your length of residence is too short than the lender’s requirement, unstable employment record, or you fail to meet eligibility requirements.
Re-assess Before Re-Apply
After knowing the possible reasons for rejection, do not reapply immediately. Take time to re-evaluate your financial profile from a lender’s perspective and resolve the red flags.
- Examine Your Credit Reports – A credit report is similar to a report card showing your credit history. Potential lenders use this to determine your capability to pay the loan. Your credit report shows the date you open any loan, the current balance on each loan, payment history, credit limits, bankruptcies, and other identifying information.
Check for common errors/red flags. It may include clerical error, incorrect loan/credit card application to account, closed credit card wasn’t “closed by the grantor,” and others.
- Fix Errors in Your Credit Reports – If you see any mistakes/errors, reach out to the credit bureau to immediately correct them. In the Philippines, you can file a dispute with the Credit Information Corporation (CIC).
Some tips:
- If you’re divorced, make sure that your spouse’s debts don’t reflect to yours.
- Your bad records should not be seen on your credit report. On average, credit reporting companies remove it after seven years.
- Mysterious accounts and bad debts “can” be caused by identity theft.
- Talk to Your Lender – If you’re unsure whether your financial profile will be approved, don’t hesitate to talk to your lender. Ask if they anticipate any problems before re-application. A responsible lender will help you figure things out. They should also advise on how long you should wait before reapplying.
Plan for Short or Long-term Strategies
Now that it’s clear on possible rejection reasons and you have already fixed them, it’s about time to apply short and long-term strategies to improve your overall financial profile.
- Use Collateral – If you plan to apply for a personal or business loan, having collateral would help. Collateral refers to an asset pledged as a security for the loan. It serves as protection for the lender. It can be your property or vehicle. Using collateral would boost the lender’s confidence in your loan approval. Just make sure you’re aware of the risk, such as losing your home or any collateral.
- Get a Co-signer – If you think that your income isn’t sufficient to get approved, it’s better to get a co-signer. A co-signer is a person such as your parent, a close family member, or a friend who can pledge to be responsible for your loan. If you fail to pay, the lender will go after you and your co-signer.
- Check other Lenders – It doesn’t mean that you got rejected by your current lender means the rest of the lenders will also reject you. If you think you have a solid financial profile and did your best to fix everything else, you should probably start looking around. Check other lenders who might view your profile differently and approve your loan. Ask your family and friends for recommendations or check reviews online.
- Build Credit – Some loan denial may be due to reasons that you can’t fix overnight, such as your credit history. Start building a strong credit history. Right after approval, pay your loan on time until it improves gradually. Strong credit history will also open you to lower interest rate offers and, soon, zero rejections.
- Increase Your Income – One of the critical parameters lenders check is your source of income. If you plan to apply for a loan in the future and see that your current income won’t fit the requirement, start increasing your cash flow. Create side hustles. Start a business or something that interests you.
- Pay Down Your Debt – Your existing loan affects loan approval. If you have multiple loans, maybe you can consider debt consolidation or find ways to reduce your debt. This will improve your debt-to-income ratio and makes you more financially capable.
Rejection is Part of the Loan Process, Don’t Give Up
If your loan application was rejected, don’t give up. Remember that it’s part of the process. Follow the above tips and get approved on your next loan application.
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