What should you do if you’re denied a loan? Your strategies are going to vary, depending on what type of loan you’re looking for. A mortgage? A car loan? A business loan? Still, you may want to try the following to help get your loan on track, according to money.usnews.com.
Find out why you were denied. This is important. If your credit score is in ruins, you’ll want to fix that.
“Errors regarding a person’s credit aren’t uncommon and can have a drastically negative effect on your ability to secure a loan. If your problems are due to errors, talk to the lender again, show him proof of the errors, and reapply,” Judy Bates, a personal finance author who also makes local television appearances on Fox 6 TV in Birmingham, Alabama, said. And, of course, if there are no errors on your report, you’ll want to work on paying off debt and paying bills on time until your score begins to climb again.
You could see if somebody is willing to co-sign for your loan. If you’re a young adult with a good job but not much of a credit history, asking you parents to co-sign for a loan may not be a bad idea. There are times when co-signing for a loan isn’t such a bad plan.
But often it is because if you can’t pay the loan back, your co-signer will have to. If neither of you can, then you’ll both see your credit score and credit history ravaged.
“I personally would never co-sign a loan,” Bates says. “In my opinion, if you need a co-signer, you need to work on improving your credit and not borrow more money.”
You could look for a lender that specialises in offering loans to people with bad credit. Korey Adekoya, the business development manager at Shabana Motors, a car dealership in Houston, suggests this – if you research the lender beforehand.
“There are plenty of places that offer bad credit loans, but some are better than others,” Adekoya says. “Watch out for high interest rates that could put buyers in a pickle if they’re already struggling with money.”
So how can you determine if a lender is ethical – or one that you should stay far away from?
“You need to determine whether or not they actually want you to pay the loan back,” Adekoya says. “A good lender always wants their money back, but there are some who charge large rollover fees to extend the life of your loan. This is usually a good indicator that you could be entering a cycle of debt.”
He also suggests asking a lot of questions and walking away if the answers aren’t satisfactory.
“Predatory lenders prey on the weak, and your bad credit is an open invitation for them to lure you in. Take your time when configuring your loan and understand all your options and consequences before signing the dotted line,” he says.
Request less money. Maybe if you were looking to get a smaller home, a less expensive car, a smaller amount of money for a personal loan – maybe your loan application, in that case, would be accepted.
You might also want to try to get smaller loans from two or more lenders, to add up to what you need, suggests Raeshal Solomon, a Nashville, Tennessee author and speaker who specialises in teaching kids about the value of money.
“Sometimes you can get a little from more than one place to equal your total,” she says.
Try, try again. This is one path. Just because one lender said no, it certainly doesn’t mean they all will. (It may mean that your credit isn’t stellar, and you won’t get the best rates. But if you need a loan, you need a loan.)
“Too often people assume because one bank or lending institution denied them for a loan that they should just give up because they will be denied everywhere. This isn’t the case. Lending institutions and banks all have a different set of parameters,” says Ryan Fitzgerald, owner of Raleigh Realty in Raleigh, North Carolina.
He says that one of his clients was denied a home loan 10 times. He got a loan, however, on the 11th try.
“There were tears in his eyes when he was told he would not be able to receive a home loan. He didn’t give up. He kept going and eventually closed on his house, albeit four weeks after the original closing date,” Fitzgerald says.
But do keep in mind, and this is just common sense, that if 10 lenders have shot you down, they probably see you as a credit risk. You may want to take that as a sign and get your finances in better shape before possibly taking on a loan you can’t afford – or a loan that ends up having terrible terms.
On the other hand, giving up just because you’ve been denied, say, once, probably is a mistake.
Catherine Fiehn, who owns a photography studio in Milford, Connecticut says that she was declined for a business loan several years ago – not because she had bad credit, but because she basically had no credit.
“I was a ghost,” she says. “I didn’t use credit in any form because I never needed to.”
Fiehn mentioned that to her banker, who ended up visiting her studio and found a well-established storefront. Fiehn was granted her loan.
Five factors that affect a loan application
All lenders have their own criteria, but here are five commonly considered factors that can play a role in a credit decision, according to money.usnews.com.
Proof of income. It’s not enough to simply state your income. Some lenders want to see proof, either in the form of pay stubs, bank statements or even old tax forms.
Employment history. Rich Hyde, chief operation officer of Prestige Financial, which specializes in auto loans for buyers with subprime credit says subprime lenders often look for a stable employment history when weighing the likelihood of a borrower being able to pay back a loan.
Housing history. As with employment, lenders are looking for stability when it comes to housing. Frequent moves could indicate money management problems or increase a lender’s chances of not being able to track down a borrower who defaults on a loan.
Debt-to-income ratio. Sometimes broken down as a payment-to-income ratio, this factor calculates debt as a percentage of your income. “It’s a good idea to keep that debt-to-income ratio below 36 per cent,” says Mikel Van Cleve, director of personal finance advice for USAA Bank. However, a higher ratio may not automatically disqualify someone from a loan.
Recent payment history. If you have past bad credit, a lender may consider when that occurred. Missed payments from three years ago may not be a concern, but missed payments from last month could sink someone’s chances for a loan.
Social media. “Data companies are continuing to look for new ways to help lenders,” Van Cleve says. That includes surveying social media sites for signs a potential borrower may be irresponsible with their money.
Surprisingly, a bankruptcy may not mean you will automatically be denied a loan. “A recent bankruptcy means you don’t have other debt we have to compete with,” Hyde says.- Femi Asu