Imagine planning a big financial move for a long time and receiving a rejected loan application when you finally apply for one! Sounds devastating, right? Financial moves are basically big milestones that one plans for a long time and getting a rejection can feel like a major setback. But don’t take it personally because as much as the rejection feels pretty direct, it could be backed by a number of reasons which may or may not be connected to you.
It can also act as a good eye-opener for the fact that you should start working towards building strong credit health. Now, building credit health is beneficial if you look at the long-run. It will be sustainable and befitting in helping you realise your goals. Now, the first question that hovers over every applicant’s mind is “How will I know if my loan gets rejected?”
When a lender rejects a loan application, they send out a letter called the ‘adverse action letter’ which basically explains the reasons behind rejecting the application. It elaborates on the information shared by the credit scoring agency and you are entitled to get one free credit report within 60 days of rejection. This will only give you information about your credit history and risk factors. If these are not the reasons behind denying you the loan, then you can contact the lender directly.
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Possible Reasons for Loan Rejection: Lenders have their parameters set and they adhere to those while evaluating credit applications. The reasons for rejecting your loan will be listed in your adverse action letter. The 6 most common reasons behind the rejection of credit application can be as follows:
1. Low credit score
2. Low income as compared to the size of loan applied
3. Inaccurate application details
4. Job instability
5. Number of pending loans too high
6. Not eligible based on age, nationality, education qualification (at times), etc.
If the reason for your loan rejection is not clear under any of these sections, then you can contact the lender to elaborate on the chosen reason.
Next steps after a rejected credit application
You cannot do anything to change these decisions immediately, however, once you have identified the reasons behind your lender’s decision you can move on to make a plan to overcome it. Say your credit application was rejected due to several pending loans, then your first motive is to clear them and then move onto the next steps. Make sure that you clear bigger loans first and reduce your credit utilisation ratio, you can then move on to smaller loans with smaller penalties.
In case of incorrect application details and job instability, you will have to take the necessary measures. But if the loan is rejected due to nationality or educational qualifications, then you may have to find another way of picking up lines of credit.
But if the reason for your loan rejection is a low credit score or short credit history, then you can start building it by picking smaller loans and credit cards. This may take some time but this will mature your credit history for bigger loans in the future. You can start by checking your Personal Credit Score to finalise your next steps.