What to do if your loan application is declined

What should you do first when a loan is declined?

Pause. A decline feels personal, but it is one lender applying one set of rules to one application on one day. The quickest way to turn it into something useful is to find out exactly why it happened. Rushing into five more applications is the common reaction, and it is usually the one that does the most damage.

Moneysmart explains the reasons that cause most declines: issues on the credit report such as late or missed repayments, unpaid debts, many recent applications, a default or a serious credit infringement; and current finances such as income that is too low for the amount, high expenses or debts that reduce repayment capacity. Knowing which bucket you are in decides what comes next.

How do you find out why?

Ask. Moneysmart says lenders have to tell you if they reject your application because of your credit report. For other reasons, the lender or broker may only give a general explanation, such as serviceability or security, but even that points you in a direction. If a broker lodged the application, they can usually get more detail from the lender’s assessor.

Write down the reason in plain words. “Declined because of two missed payments last year” is far more useful than “declined”.

How do you get a free credit report after a decline?

The OAIC says a credit reporting body must give you your consumer credit report free once every three months, and you can also get one free if you have been refused credit within the past 90 days. Our guide on how to get your credit report walks through the process. Request from more than one body, because they can hold different information.

When you read it, check:

• Defaults and late payments: are they correct and correctly dated?
• Accounts: are there any that are not yours?
• Enquiries: do they match applications you actually made?
• Limits: are any higher than they should be?

If you find an error, you can ask the credit reporting body or the credit provider to correct it, and Moneysmart notes you do not need to pay a credit repair company to do so. See how to fix a mistake on your credit report.

What if the credit report is correct?

Then the job is to understand and present it. The OAIC sets retention periods: defaults and credit enquiries stay for five years, repayment history for two, financial hardship information for one year and serious credit infringements for seven. See how long defaults and late payments stay on your credit file for the details.

A paid default still shows, but a paid one with a clean record afterwards tells a better story than an unpaid one. Many lenders will look at the context: when it happened, why, and what has changed. Some lenders are more flexible than others, which is the whole reason a broker’s knowledge of policy matters. The guide on can I get a home loan with bad credit covers that for home loans, and bad credit home loans shows the product side.

What if it was about serviceability, not credit?

Then the lender did not think your income covered the loan after costs and debts. Options include:

• Borrowing less, or over a different structure.
• Reducing credit card limits and other commitments (see what is loan serviceability).
• Showing income in a different way, as in how to prove income without payslips.
• Using a lender with a different income policy, such as a low doc loan provider.
• Adding a guarantor or co-borrower (read the guarantor guide first).

Different lenders count the same income differently, which means a decline at one bank may become an approval elsewhere.

What if it was about the property?

Security issues include a low valuation, an unusual property type, small apartments, rural land, a title that has a problem or a loan that is too high against the value. See how to get a property valuation for a loan and what is LVR. Non-bank and private lenders tend to treat property differently, as in difficult home loans and private loans with bad credit.

Should you apply to another lender straight away?

Usually not before you know why. Moneysmart warns that each application is recorded on your credit report, and too many applications in a short time can lower your credit score. The guide on why applying everywhere hurts your credit score goes further. A better approach is to fix or understand the reason, then approach a lender whose policy fits.

What if you think the decline was unfair?

First raise it with the lender. If you are not satisfied, check the lender is a member of the Australian Financial Complaints Authority. Moneysmart advises always making sure a lender is a member, and AFCA is the external dispute resolution scheme for credit complaints. A decline on legitimate policy grounds is not unfair, but a mistake such as wrong information on your file is worth challenging.

What are the alternatives when mainstream lenders say no?

Depending on the situation, options include non-bank lenders, specialist lenders and private lenders. For example, non-bank home loans, difficult loans, a second mortgage or credit-impaired loans. Private lenders usually put the security and exit strategy first, but they need clear answers, and the cost structure is different from a bank. The guide to how to refinance when your bank says no covers the refinance angle.

How does Ownright help after a decline?

Ownright is about solutions. When a bank has said no, a lender has let you down or the deal is complicated, finding a way is our daily work. Trevor Scott has more than 40 years in finance and the team arranges loans in every state and territory. We read the decline reason, check what lenders actually care about, and look at options some brokers do not know exist. If Ownright can’t find the solution, no one can, though no approval is ever guaranteed.

An illustrative example: an applicant is declined because of a recent enquiry cluster and a small default. A broker explains the background, tidies the file and presents it to a lender that considers the explanation, rather than lodging the same application again.

What mistakes make a decline worse?

• Reapplying elsewhere the same week.
• Ignoring the reason and hoping the next lender will not notice.
• Paying a credit repair service to do what you can do free.
• Dropping the idea entirely when a different structure could work.

What does a sensible action plan look like after a decline?

Here is a simple sequence you can follow, whatever the reason.

1. Day one: note the lender, the date and the stated reason. Do not apply anywhere else yet.
2. Within a week: request your credit reports and read them line by line.
3. Within two weeks: list what you can change and what you cannot, such as an old default versus a high credit limit.
4. Next few weeks: make the changes, gather updated documents and keep your statements clean.
5. Then: speak to a broker about which lenders suit the profile and lodge one carefully chosen application.

If the matter is urgent, a broker can compress these steps and often find a pathway without waiting for every item to be perfect. The point is to make the second application stronger than the first.

When is a decline a sign to change the product?

Sometimes the loan itself is the problem. A purchase loan may fail on serviceability while a smaller loan, a different property or a split structure would pass. A bank business loan might be declined where a secured option works, as with secured business loans or business loans with bad credit. A personal loan decline might point toward a secured structure, covered in secured vs unsecured personal loans.

If time pressure is the issue, private lenders sometimes work quicker, as explained in how fast private lending can settle. Speed can be possible, depending on the lender, the security and how quickly documents arrive. Whatever route you take, ask what it costs and how it ends before you commit.

Sounds like you still need that loan?

Sounds like you’re looking for a second chance at finance after a no. We’re the lending experts in loans the banks turn away, so click the button and see if you qualify.