When you apply for a personal loan – whether to pay for home improvements, a new car, debt consolidation or anything else – the lender will check your credit history before deciding whether or not to approve your application.
If the lender thinks you are a high-risk borrower who won’t be able to pay back the loan, it may reject your application.
There can be lots of reasons why this might happen, and here we explain everything you need to know so you can plan your next steps if your application is rejected.
At a glance:
- You can often check your eligibility for a loan before applying to see how likely you are to get approved without affecting your credit score.
- Lenders may decline a loan application if you have a poor credit score, don’t have sufficient income, or don’t meet their eligibility criteria, for example.
- If you’ve been declined for a loan, applying for another one straight away can damage your credit score and harm your ability to borrow in the future.
Why was my loan application declined?
Lenders don’t need to tell you why they refused to offer you a loan, which can be frustrating when you’re trying to figure out what went wrong. However, some possible reasons that could explain why your loan application was declined include:
- a poor or limited credit history
- too many applications for credit in a short space of time
- too many existing loans and credit agreements
- incorrect information on your credit file or loan application
- insufficient income, suggesting to the lender that you can’t afford the loan
- your employment isn’t seen as a secure or reliable source of income
- there are indications of fraudulent activity on your file
- your finances are linked to someone with bad credit, e.g. you have a joint mortgage
- you don’t meet the lender’s eligibility criteria, e.g. a minimum income requirement
What to do after you’ve been refused a loan
If you haven’t been accepted for a loan, you should try to work out why the lender declined your application and aim to resolve that issue before applying again.
There are several things you could do to help increase your chances of getting a loan in the future.
- Check your credit score.
- Improve your credit score.
- Don’t apply for another loan straight away.
- Pay off any other debts.
» MORE: Tips for successfully applying for a loan
Check your credit score
If you are rejected when you apply for apersonal loan, you can ask the lender for the name of the credit reference agency it used.
You can then contact the credit reference agency andask for a copy of your credit history, which should alert you to anything out of the ordinary, such as missed repayments or if someone has fraudulently used your personal details to make an application for credit.
If you’ve had any shared finances , such as a joint bank account or mortgage, check if it is still affecting your credit score. If you no longer have a financial association with the other person (if you’ve split up, for example), then you may be able to ask the agency to remove them from your credit file.
You can also check your history to see if it includes any mistakes, such as an incorrect payment or an error with your personal details. If this has happened, you’ll need to contact the agency and ask it to correct the problem.
» MORE: How to check your credit score
Improve your credit score
Your credit score could be a reason for your loan application being declined, as lenders view people with poorer credit histories as a higher risk.
So improving your credit score could help you to get accepted for a loan. You can build up your score in a number of ways, such as by:
- registering on the electoral roll
- keeping up with repayments on any other debts
- making sure the details on your credit score are up to date and correct
- signing up for schemes such as Experian Boost or Credit Ladder, where you can share information on regular payments that you make, such as rent
» MORE: How to improve your credit score
Don’t apply for another loan straight away
Every time you make a credit application, whether you are approved or not, the credit check by the provider makes a mark on your credit file.
Making a lot of applications in a short space of time may harm your credit score, as it will look as if you’re desperate and not in complete control of your finances. Therefore, it’s important not to keep applying if you’ve been rejected for a personal loan.
Pay off any other debts
If you’re in a position to do so, paying off your existing debts could help you to get a loan in the future. Whether you make overpayments on your credit card or pay off an outstanding loan in full, you could improve your credit score and reduce the pressure on your finances.
As a result, a smaller proportion of your income would go towards paying existing debts so lenders may be more receptive to a new loan application.
What to consider before applying for a personal loan
If a lender doesn’t think that you can afford to repay a loan, it shouldn’t approve your application.
You can work out how much you can afford to borrow and repay each month using our loan calculator, which can give you an idea of what you could borrow without affecting your credit score
Once you make a formal loan application, it will be recorded on your credit history so you should only apply if you are confident of being approved.
Before applying for a loan, make sure you’ve considered the following points:
- How much does the loan cost? Check the annual percentage rate (APR), which tells you the likely cost of a loan over one year, taking into account the interest rate and any fees.
- What is the repayment term? Monthly payments may be lower if you choose a longer term. However, the longer the loan term, the more expensive the loan is likely to be overall as you pay more in interest.
- What is the lender’s criteria? Check that you meet all of the lender’s eligibility requirements and apply for a loan which is suitable for you, whether that’s a standard personal loan or a specialist bad credit loan.
- Have you checked your eligibility? Many lenders allow you to see if you are eligible for one of their loans without affecting your credit score. This allows you to see your chances of approval before you submit a formal application, which could reduce your chances of applying for an unsuitable loan and getting rejected.
- Is the information in your application correct? Double-check that your loan application is accurate and doesn’t have any mistakes, as this could affect a lender’s decision.
Alternatives to personal loans
A personal loan may not always be the most suitable option for you. The best way to borrow money will depend upon your circumstances, including your credit score, the reasons for borrowing the money, and your ability to repay your debt.
Family or friends
Depending on your individual situation, borrowing from family or friends may be an alternative to taking out a loan. If you choose this option, make sure you draw up an agreement in writing to try to avoid any disputes over repayments in the future.
Credit union
A credit union may be able to offer you a loan if you’ve been turned down by high street or other lenders. Each credit union offers different loans with their own eligibility criteria.. However, all credit unions will still run checks to make sure you can afford to repay a loan.
You usually need to be a member of a credit union to apply for a loan, but you may be able to join one at the same time as applying. Be aware that you will typically need to meet a ‘common bond’ requirement such as living or working in a particular area, or working for a specific employer or industry, to join a credit union.
» MORE: Credit union loans explained
Guarantor loan
You could also consider applying for a guarantor loan. Adding a guarantor, who agrees to pay the loan if you can’t, gives the lender extra reassurance so it may be more willing to approve your application.
Secured loan
If you are a homeowner, or if you own another high-value asset such as a vehicle, you may choose to apply for a secured loan.
A secured loan could increase your chances of getting a loan and accessing a better rate of interest, but it comes with the risk that the lender could repossess your property if you fall behind on your payments.
Credit cards
Another alternative to a loan is taking out a credit card. If you do this, you should look for one with the lowest interest rate possible and one which you can comfortably repay. There is no point, for example, in taking out a card with a high interest rate that you can’t clear each month as you’ll end up paying out a lot in interest charges.
If you manage to pay off your credit card in full each month, or before the 0% interest period ends (if applicable), then you won’t pay any interest on your card at all.
Bear in mind that the best credit card deals are typically reserved for those with the best credit scores.
Image source: Getty Images
About the Authors
Rebecca Goodman
Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent.
Read more about Rebecca Goodman and explore their articles
Rhiannon Philps
Rhiannon has been writing about personal finance for over three years, specialising in energy, motoring, credit cards and lending. After graduating from the University of Cambridge with a degree in…
Read more about Rhiannon Philps and explore their articles
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