Being turned down for a loan can be emotionally and financially straining.
While it is not easy to always look at the positive side, being turned down for loans can be a good thing. Loan denial tells you that there is a problem with your credit and financial situation. It should be a warning sign that it is time to learn more about your financial situation and understand why you were denied. Understanding how lenders view your credit report is critical and will set you up for success the next time you apply for a loan.
You’ve been Denied. Now What?
1. Understand why you were denied
You can contact the lender, and they will provide you with an explanation as to why you were denied a loan.
Common issues of what went wrong with your loan application:
- Poor Credit Score: Your credit score is the number one reason a lender would deny you a loan and is the backbone of your overall credit history.
- Errors in your credit report: Review your credit report of any errors. If you can identify an issue, you can dispute it with either of the two credit bureaus in Canada: Equifax and TransUnion.
- Limited credit history: If you have little or no credit history, lenders are more likely to deny you a loan. To build your credit score, consider applying for a Credit Building Program/Account or a secured credit card. Both products are highly recommended for people with poor, little or no credit.
- Incorrect information on your application: Double check all your information before applying.
- Perceived high financial risk: If your expenses are higher than your income, a lender may view this as high risk.
- Did you meet basic requirements: Most loan applications come with a minimum age, income level, and other conditions. Make sure you meet the requirements.
Your Credit Score
Five main factors are impacting your credit score:
- Payment history
- How much credit you have available
- Credit history
- Types of credit (loans, credit cards, etc.)
- Too many inquiries on your credit profile
2. Review your Credit Report
You can see where you stand with your credit score by getting a credit report, which is a summary of your borrowing history. You should review your credit report for accuracy.
Several online sources do this at no cost, as well as TransUnion and Equifax.
You should review your credit score at least once a year to make sure the information is correct. If you are planning an important financial decision over the next few months, be sure to review your report ahead of time and make any necessary steps to ensure your score is optimal.
3. Address your Finances
Once you’ve gone through the process of understanding why you were denied for a loan, review your credit report and have a clear picture of where you stand financially, you can now move on to developing a plan on how to rebuild your credit to help prevent another loan denial.
Focus on improving your financial situation, paying down debt and improving any other issues that are affecting your credit report.
If you are not sure of next steps on how to rebuild your credit, some companies focus on helping Canadians boost their credit score and develop customized plans for you to get you back on track. Climb is an online Credit Building Service with the goal of building better financial futures. They review your credit report, educate you on your credit score (what it means and how to improve) and develop a customized plan to boost your credit score and hopefully, get you approved on your next loan.
Another solution, if you are looking for a quick fix, could be the Capital One secured card. Using this card responsibly will help boost your credit score and result in positive payments on your credit report.
If waiting to rebuild your credit score is not possible because you need money now, you could consider using savings, borrowing from a family member or a friend or asking your employer for an advance and working out a payment plan.
Being turned down for a loan can be discouraging, however, take this opportunity to take a hard look at your credit and financial situation and put a plan in place to improve your credit score. By doing so, you will improve your chances of being approved for a loan in the future.
