What can I do if I’ve been declined for a loan?
If you are declined, you could ask the lender why this happened.
The lender doesn’t have to tell you why your application was rejected, but they should tell you which credit reference agency (CRA) they used. You can then obtain a free copy of your credit report from the CRA to figure out how to improve your chances next time.
Top 10 reasons for being refused a debt consolidation loan
Each lender takes different eligibility criteria into account, but here are some common reasons why loan applications get turned down:
- Low disposable income
- A high debt-to-income ratio
- Job insecurity
- A poor or limited credit history
- Financial ties to someone with bad credit
- High credit utilisation ratio
- Mistakes on your credit report
- Too many credit applications in a short period
- Not being on the electoral roll
- No collateral (for a secured loan)
Let’s see how these factors impact your credit application, and what you can do to improve your chances of approval.
1. Low disposable income
Your loan application could be rejected if you don’t meet the lender’s minimum income requirements or affordability criteria. For example, you may not have enough disposable income (spare money after your outgoings) to pay your loan each month.
2. High debt-to-income ratio (DTI)
Debt-to-income ratio is the percentage of your monthly gross income (before deductions) that goes towards debt payments. Here’s an example of how to calculate your DTI:
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Mortgage £900
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Car finance £300
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Credit card £50
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Loan £50
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Total monthly debt payments: £1,300
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Gross income: £3,000
Debt (£1,300) divided by income (£3,000) = 0.43 x 100 = 43% DTI
A high DTI ratio can affect your loan eligibility as it limits the amount of income you have spare to pay for a new loan.
The figure that triggers a high DTI varies from lender to lender, but generally a ratio of 39% or under is considered good. A DTI between 40% and 49% is seen as riskier, so you may need a good credit score to get approved.
Above 50% is considered high risk, which means lenders will probably carry out more affordability checks and offer higher interest rates. Anything over 75% means your loan application is more likely to be rejected, or you may need to find a specialist lender.
3. Job insecurity
If you are self-employed or on a fixed-term contract, lenders may see you as riskier than someone who is employed and has a permanent job. They want to know that you have a secure source of income and will be able to keep up the loan repayments.
4. Poor or limited credit history
It may be harder to get approved for a debt consolidation loan (or any type of finance) if you have a bad credit history. This can be due to negative marks like missed payments or unpaid debts on your credit file.
You may also come across as risky to the lender if you have a limited credit history or no credit history at all. Without a track record of payments, it’s difficult for them to tell if you are a responsible borrower who will always pay on time.
You may find it easier to get a loan for bad credit, designed for those with poor credit, but higher interest rates usually apply.
If you are not eligible for a bad credit loan on your own, making a joint application or getting a guarantor with a strong credit score could be an option. A guarantor co-signs a loan agreement, promising that they’ll cover the payments if the borrower falls behind. Bear in mind that higher interest rates usually apply.
Alternatively, you could work on fixing a thin credit history and boosting your credit score before you apply.
5. Financially tied to someone with bad credit
If you have joint finances with someone who has bad credit, it may affect your ability to repay debt and your eligibility for credit.
When you apply for a loan, the lender will check your credit history to see how well you’ve managed your finances in the past. They can also check the credit history of any financial ties on your credit report.
If your financial tie has a bad credit history, the lender may worry that this will affect your affordability for a loan. For example, if your partner is struggling, you might decide to help them pay their debts, before paying your own.
You can get old financial ties removed from your credit report by contacting the relevant credit reference agency, once the joint debt has been paid in full. This is known as a ‘notice of disassociation’.
6. High credit utilisation ratio
Your credit utilisation ratio is the percentage of available revolving credit you’re using. Credit cards and store cards are examples of revolving credit, as there is no set end date.
Put simply, the closer you get to your total credit limit across all your cards, the higher your credit utilisation ratio will be. In turn, the riskier you will appear to lenders and the harder you may find it to get approved for a loan.
If possible, use only a small percentage of the total credit available to you (30% or less). Reducing the amount you owe should boost your credit score and show lenders that you’re a responsible borrower.
7. Mistakes on your credit report
Loan applications are sometimes rejected due to errors such as a typo in your address, or a late payment that was actually paid on time. Regularly checking your credit report can help you spot mistakes before you apply for finance.
You can check your report for free using the three main credit reference agencies in the UK: Experian, Equifax and TransUnion.
To get an error removed, contact the relevant lender and credit reference agency to raise a dispute. The credit reference agency should add a ‘notice of correction’ to your credit report while it’s being investigated.
8. Too many credit applications
Each time you apply for a loan, the lender will run a hard credit check of your credit report. This shows them how well you’ve managed your finances in the past and helps them decide whether to lend money to you.
Too many hard credit searches in a short period of time can harm your score and make you appear desperate for credit, which could put lenders off.
It’s worth using an eligibility checker to find out your chances of approval before you apply, as this won’t affect your credit score.
9. Not being on the electoral roll
Lenders check the electoral register to make sure you are who you say you are, to avoid identity theft and fraud.
You can sign up on the government website for free. This is one of the most straightforward ways to boost your credit score and prove your identity.
10. No collateral for a secured loan
You need to be a homeowner to apply for a secured loan, as the loan is tied to your property. However, you don’t need any assets to use as collateral for a personal loan.
Alternatives to debt consolidation
If you don’t qualify for a debt consolidation loan or want to consider other options, you could look into:
- Using any available savings to clear your smallest debts and improve your DTI ratio.
- If you’re a homeowner, you could consider remortgaging with additional borrowing and using these funds to repay your debts.
- Entering a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).
- Seeking free, professional debt advice from Money Wellness, StepChange, Citizens Advice, National Debtline, or MoneyHelper.
Check your eligibility for a debt consolidation loan
- Reduce your monthly payments
- Personal and homeowner loans available
- Getting a quote is FREE and won't affect your credit score
Intelligent Lending Ltd is a credit broker, working with a panel of lenders. Homeowner loans are secured against your home.
Disclaimer: All information and links are correct at the time of publishing.
Verity Hogan
Personal Finance Writer
Verity is a personal finance writer and journalist with over 13 years of experience working in a variety of industries, including 3 years specialising in motoring and debt. She contributes engaging, informative guides on everything you need to know on debt consolidation and car finance for Ocean.
