Can You Decline a Loan After Applying?
Considering declining a loan? Understand your options, the process, and what it means for your financial standing.
Understanding the process of declining a loan is beneficial, whether due to changing financial circumstances, discovering better terms elsewhere, or simply deciding the loan is no longer needed. This decision point can arise at various stages, from initial application to after formal approval, and knowing the appropriate steps can help manage the process effectively.
When You Can Decline a Loan
You can decline a loan at multiple points throughout the application and approval process. An application does not obligate you to accept funds, nor does approval create a binding agreement until you consent to the terms. You can withdraw an application before a lender makes an offer, or you can decline a loan offer after receiving it but before signing any agreements.
Even after signing loan documents, the Right of Rescission may allow you to cancel certain loans. This right, established under the Truth in Lending Act (TILA), provides a three-business-day “cooling-off” period during which you can cancel specific home-secured loans. This includes mortgage refinances, home equity loans, and home equity lines of credit (HELOCs) that use your primary residence as collateral. The rescission period begins once you have signed the promissory note, received the TILA disclosure, and received two copies of a notice stating your right to rescind. This right does not apply to all loan types, such as purchase mortgages for a new home, personal loans, or auto loans.
Financial and Credit Implications of Declining
Declining a loan offer does not negatively impact your credit score because no new debt is incurred. However, merely applying for a loan results in a “hard inquiry” on your credit report. This inquiry occurs when a lender checks your creditworthiness as part of the application process and will remain on your report for up to two years. A single hard inquiry causes a minimal and temporary dip in your credit score, often by five points or less, and its impact fades within a few months.
Some loans may involve non-refundable application or appraisal fees, even if you decline the loan. Application fees are upfront charges to cover administrative costs and are often non-refundable. For example, mortgage application fees can range from minimal amounts to over $1,000, while personal loan application fees might be $15 to $50. If an appraisal for a home loan has been conducted, the associated fee for that service may also be due.
How to Formally Decline a Loan
Clear and timely communication with the lender is important when declining a loan. If you are declining an offer before signing, you can simply inform the lender that you no longer wish to proceed. This can be done through a phone call, email, or via an online portal if the lender provides one. Requesting and retaining confirmation is prudent.
If you are exercising the Right of Rescission for an eligible home-secured loan, you must formally notify the lender in writing within the three-business-day timeframe. This written notice should be delivered to the lender or postmarked before midnight of the third business day. While lenders are required to provide instructions on how to rescind, sending the notice via certified mail with a return receipt can provide proof of submission. Upon receiving your notice, the lender is required to refund any money paid and release any security interest in the property within 20 days.