Loan Application Rejected Due To Credit Issues? Know What To Do Next

Having your loan application rejected by the financial organisation may be quite disheartening and perhaps disrupt or delay the things you want to do with the credit. However, you must understand that the lenders reject the loan for different reasons. But the most common reasons for rejection are a history of delays in debt repayment, having multiple credits at the same time, or a record of being a loan defaulter.

Monitoring the impact of the loan rejection on your credit score is also important, as multiple loan rejections may worsen your credit score, and it may take several months or even years for you to recover from a bad credit score situation.

If the lender recently rejected your loan application due to credit issues, then it is paramount that you first understand the cause of the rejection and then take corrective measures accordingly.

Know the exact cause of loan rejection

As soon as the financial organisation informs you that your loan application is rejected, you must ask them about the reason. Generally, the lenders communicate loan rejection reasons through a letter, enabling you to know the exact cause and take measures to rectify the issue.

For example, if the loan is rejected due to bad credit history, you may apply for a joint loan or bring in a guarantor. If the reason for rejection is a low credit score, you must take steps to improve your credit score. No matter what the reason is, knowing the specific reason is critical for improving your credit standing.

Make timely debt payments

If you missed any EMI (equated monthly instalment) payments in the past, your credit score could take a significant dip. So, when your loan is rejected, it is advisable to check your credit score, and if it is below 700, you must prioritise repaying the existing debts and ensure that you make timely payments.

As you continue to make these payments, over a period, your credit score will automatically go up. Once you get a score of up to 750 or more, you may be in a better position to get the loan approved with terms and conditions that are aligned with your financial standing.

Avoid applying for multiple loans at the same time

Once the financial organisation rejects your loan application, you may want to apply for the loan again immediately with different lenders. But this move may prove counterproductive. This is because applying for credit with multiple lenders at the same time would reflect your credit-hungry behaviour. And, with each application, the lenders will initiate a hard inquiry into your credit profile.

This, in turn, can worsen your situation, and your chances of getting a loan in the future may be affected.

Avoid being a guarantor

Sometimes, your loan application may get rejected because you signed as a guarantor for someone’s loan, and the primary borrower failed to repay the amount on time or has delayed the payment. In such a situation, your credit score may get hit and fall below the minimum score required by the lender.

In such a situation, if you are looking for tips on how to increase your credit score, the best thing you can do is avoid signing as a guarantor for someone else’s loan, especially if you are not sure about their financial capacity to repay the amount on time.

Maintain a good credit ratio

No matter what the reason is for your loan to get rejected, it is paramount that you always keep a close eye on your credit utilisation ratio and keep it at a healthy rate. The credit utilisation ratio is basically the extent of the credit limit available to you against the limit you have utilised.

A high credit utilisation ratio may cause your credit score to dip, and your chances of getting a loan may also be affected. In such a situation, if you ask any financial expert how to maintain a good credit score, they may suggest you to keep the credit utilisation ratio under 30% or less.

Choose a longer loan tenure

When your loan application gets rejected due to credit issues, it is advisable to wait for a few months or until your credit score improves and is over 750 before you apply for the loan again. Also, when you apply for a loan, it is better to opt for a longer loan tenure or the maximum tenure offered by the lender.

Although this approach may increase the overall interest payment, it may also improve your chances of getting your loan approved without any hassles.

Conclusion

Nowadays, loan rejection is not uncommon. The lenders deny extending the credit for several reasons, and if it is tied to your credit standing, you can use the above tips to improve your credit score and improve your chance of getting the loan approved in the future.