If I Apply for a Loan, Do I Have to Accept It?

Applying for a loan can certainly feel binding. You give a lender deeply sensitive personal information; they evaluate your credit and send terms. But until you formally accept those terms, you’re under no obligation to borrow from the lender. And, even after signing a loan agreement, you sometimes have (a little) time to walk away.

In this guide, we’ll cover when a loan offer turns into a legally-binding loan agreement, whether you can cancel one after the fact and how to turn down lenders without risk or penalty.  

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Are You Required to Accept a Loan Offer?

You are not required to accept a loan offer. They aren't formal contracts. They’re effectively an invitation to borrow, and you can decline one at any time if you’re unhappy with the amount, annual percentage rate (APR), repayment schedule or other key loan terms. 

You can also choose one loan offer over another. That’s important to note, as not all lenders let you pre-qualify using a soft credit check and preliminary financial information.

Lightstream, for instance, only provides personal loan offers with estimated rates and terms once you complete a full loan application.  

When Does a Loan Become Legally Binding?

Loans become legally binding when you formally accept an offer and enter into a loan contract. That typically happens in one or two ways.  

Signing the Loan Agreement

Once you go through the full loan application process and indicate your intent to proceed with the lender, they’ll put together and present you with a written loan agreement. Under the federal Truth in Lending Act (TILA), this agreement must clearly disclose the loan’s amount, APR, repayment terms, fees, total borrowing costs and more. 

You don’t have to sign this loan agreement, but, generally speaking, once you do, you’re legally obligated to abide by its terms.

Keep in mind, “an electronic signature is just as legally binding as a physical signature,” said Eric Croak, Certified Financial Planner (CFP®) and president at Croak Capital. 

Receiving the Loan Funds

Once you sign and date the loan agreement and all other required documentation (such as a promissory note outlining your repayment schedule or an electronic funds transfer authorization), the lender will disburse your loan proceeds. 

Usually, “the disbursement of funds into your account is the point of no return,” said Cody Schuiteboer, president of Best Interest Financial. 

After that, it becomes demonstrably harder and highly unlikely that you can back out of a loan, with a few key exceptions. 

Can You Cancel After Accepting a Loan?

You can sometimes cancel a loan after signing a contract, but the option varies by loan type and lender. When a loan or lender permits cancellations, your window to request one is usually quite short. 

Cooling-Off Periods

Some loan types, most notably home equity loans, home equity lines of credit (HELOCs) and certain mortgage refinances, are subject to a federally mandated “right of rescission,” which gives borrowers three days to cancel without penalty.  

Personal loans don’t typically offer the same protection, sometimes referred to as a “cooling-off period.” However, some states, like Hawaii, have right of rescission rules for short-term, small-dollar credit, like payday loans, and some personal loan providers offer short cancellation windows voluntarily.

These windows may vary. Upstart and SoFi, for instance, allow you to cancel before loan funds are disbursed, which can take as few as 1 to 2 business days. LendingClub actually lets you cancel a personal loan if you call them within 5 calendar days of funding.    

“Make sure to read your loan agreement and look for the cancellation policy before you accept a loan,” Croak said. 

Early Loan Repayment

You can generally pay off a loan early, though doing so could incur a prepayment penalty. 

Prepayment penalties allow lenders to recoup some or all of the interest they would have earned over a loan’s full term. They’ve become increasingly rare among personal loans. (None of the big-name lenders in the space charge them.) However, they’re a bit more common among home loans.  

Prepayment penalties, and whether they’re calculated as a flat fee, a percentage of the outstanding loan principal or a certain period of interest, are generally disclosed in your loan agreement. They could be worth paying if you simply want to get out of the debt or your interest savings outweigh the penalty cost.

How to Decline a Loan Offer or Cancel a Loan Application

You can often safely decline a loan offer or cancel a loan application by taking the following steps:

• Let pre-approved or pre-qualified offers expire. Most pre-approved loan offers become automatically invalid after 30 to 90 days.  

• Contact the lender to formally decline an offer if you’re concerned about identity theft or other risks. Doing so in writing will create a paper trail. 

• Call or email the lender if you submitted a full application, haven’t received a formal offer and no longer need or want one. They usually provide designated support channels for applicants on their website or in their communication materials.

• Follow your lender’s cancellation policy if you sign a loan agreement, but wish to rescind. Remember, you might not be able to. If allowed, lenders generally have specific steps they want you to follow. These steps should appear in your loan agreement or on their website.   

No matter what step of the process you’re in, it’s a good idea to request written confirmation of cancellation from your lender. 

Tips Before Applying for a Loan

While you’re under no obligation during the application process, it’s still a good idea to apply for loans judiciously. Formal loan applications are likely to generate a hard inquiry on your credit report, which could ding your credit score and worry lenders. 

These practical steps might help you avoid frivolous loan applications or cancellations. 

• Check your credit: That’ll give you a better idea of your approval odds overall and with select lenders. (Some only extend credit to applicants with good credit.) It’ll also help pinpoint if there’s anything you can do to improve your standing and your ability to secure favorable terms, before you hit “submit.”  

• Determine exactly how much money you need. Most lenders have minimum and maximum borrowing amounts, and you’ll want to avoid applying with one that can’t match your needs. For example, getting offered a $5,000 personal loan when you only need $1,000 is either going to force you to turn down the loan or pay unnecessarily in interest.

• Validate your ability to repay as agreed: Use online loan calculators to get an idea of what monthly payments and total borrowing costs could be across several different loan terms and APRs. That’ll give you a better idea of what type of offers you can actually afford and accept. 

• Research lenders: Ideally, you’ll only apply with providers that match your borrowing profile, desired loan amount, desired loan term and customer service standards. 

• Compare estimated rates and fees by pre-qualifying for offers from multiple lenders. Pre-qualification lets you assess your potential rates and approval odds without formally applying. Some lenders do require a full application before they’ll send offers. Submitting one could be worthwhile if you expect to qualify and have other offers to compare the terms with.  

Once you decide on a lender, be sure to carefully read the loan agreement before signing. That’ll help you fully vet the offer and avoid last-minute cancellations (when allowed) or, worse, getting stuck with a bad deal. 

Making Every Loan Application Count

You don’t have to accept a loan offer. In fact, it’s best to compare terms across multiple lenders. 

A loan becomes legally binding once you sign a loan agreement and receive funding. You might have a short window to cancel after that, depending on your loan type or lender. Beyond that, you can pay off a loan early, though a few lenders charge prepayment penalties. 

To avoid ending up in a bind, fully assess your borrowing needs (and qualifications), compare deals before selecting one and carefully read its loan agreement before adding your signature.    

FAQs

Do you have to accept a loan if you are approved?

You don’t have to accept a loan if you’re approved for one. You can simply decline or let an offer expire if you’re dissatisfied with its terms or conditions.  

Can I decline a loan after accepting it?

You can sometimes decline a loan after accepting it, depending on the loan type and lender. Some loans, including HELOCs and home equity loans, must include a 3-day “right to rescission” that allows you to cancel without penalty. Some lenders have cancellation policies that allow borrowers to back out of a loan before funds have been disbursed or shortly thereafter.

Does rejecting a loan affect your credit score?

Rejecting a loan doesn’t generally affect your credit score. However, the loan application might have resulted in a hard inquiry on your credit report. Each hard inquiry can take up to five points off your credit score; however, most scoring models group hard inquiries in short timeframes to account for rate-shopping.   

What happens if I don't accept or decline a loan?

If you don’t accept or decline a loan, the offer typically expires in 30 to 60 days, the lender closes your application and no money changes hands. You aren’t under any obligation to borrow, unless you’ve formally signed a loan agreement. 

Sources

• Consumerfinance.gov - What Is a Truth-in-Lending Disclosure for an Auto Loan?

• Consumerfinance.gov - § 1026.23 Right of Rescission

• Cca.hawaii.gov — FAQs for Consumers

• Lightstream.com - Personal Loan Website FAQ

• Upstarthelp.upstart.com - Personal Loan Website Support Page

• Support.sofi.com - Personal Loan Website Support Page

• Lendingclub.com - Personal Loan Website FAQ