How to improve your next loan application

Few people go a lifetime without applying for some type of loan. Whether the money will be used to finance an education or purchase a home, loans are an integral part of our economy.

While applying for a loan is commonplace, getting approved for a loan is not always easy. Many people have gone through the loan application process, which can be tedious and time-consuming, only to be denied by the lending institution. Such rejection can be defeating, but there are things prospective borrowers can do to strengthen their application before reapplying for a loan.

* Examine your credit report. Credit history bears considerable weight when applying for a loan, so men and women whose applications were rejected should examine their credit reports to see if any discrepancies exist that might have hurt their chances of being approved. Such discrepancies occur on a regular basis, and they can affect an individual's credit score significantly.

* Pay down debts. Even applicants who meet all of the eligibility requirements for a loan might be a red flag to prospective lenders if those applicants already have a substantial amount of debt. If your loan application was denied and you carry a lot of debt, pay down that debt as much as possible before reapplying for a loan. Credit card debt should be the first to go, as other types of debt, including student loans that are always paid on time, show that you're capable of handling an installment loan (such as a mortgage or car payment). Whether it's fair or unfair, significant credit card debt indicates to lenders that you are not financially responsible and not a worthy loan candidate.

* Find a guarantor. An unsuccessful loan application might have little to do with the applicant and a lot to do with the lending institution's policies. Some lending institutions may not lend to applicants with a very short or nonexistent credit history. In such instances, applicants may feel they are trapped in a catch-22. However, an applicant in such a position may want to ask a friend or family member to be a guarantor on his loan application. A guarantor is a person who agrees to pay the loan if the applicant cannot. For instance, many young people with little or no credit history ask their parents to be guarantors on an auto loan so they can purchase a reliable vehicle or simply earn a lower interest rate to make the loan payments more affordable. Just be sure the person you ask to be your guarantor has a strong credit rating, and don't be surprised or upset if a close friend or family member does not want to be a guarantor, which is a significant responsibility that many people would prefer to avoid.

* Save more money. Some loan applicants are rejected because their initial down payment, or lack thereof, is simply not enough to make the resulting monthly payments affordable. In the case of a mortgage or a vehicle loan, the less money you can put down, the more your monthly payment is going to be. A lending institution will examine your down payment and calculate what your monthly payment will be should you be approved. If the institution deems that monthly payment too high, then your application will be denied. If that's the reason your application was rejected, then save more money so you can make a more significant down payment when you reapply for a loan in the future.

Being rejected on a loan application can be defeating. But there are several things applicants can do to improve their chances of being approved when they reapply down the road.