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Why loan applications are rejected and what to do next

Loan applications are rejected when the applicant doesn’t match the lender’s criteria. For example, they may appear too high risk to lend to, based on their financial history or affordability. Each lender uses different criteria. So, if you’ve been rejected, there’s still a chance you could be accepted by a different lender.

6 min read
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Why have I been refused a loan?  

Getting turned down for a loan can be disheartening, especially if you don’t know why you were refused. But don’t worry, lenders all vary, and some specialise in lending to people who have had credit problems in the past.

In this guide, we’ll take you through some of the reasons why you could have been declined and help you to decide what steps to take next.

You may have been refused for one or more reasons. For example, if you have: 

  • low affordability
  • a bad or ‘thin’ credit history
  • financial links to someone with bad credit
  • mistakes on your credit report and/or application
  • made too many credit applications recently

Read on to find out what else lenders consider when you apply for credit.

Whether you are accepted or rejected comes down to how well you match the lender’s criteria and how they assess risk.

When you apply for a loan, the lender will carry out several checks, including a credit check, affordability checks, and identity checks. They take your individual circumstances into consideration and see how it matches up to their own criteria.

The lender will use this information to work out how risky it’d be to lend to you (in terms of whether they’re likely to get their money back). If they perceive you as high risk, then they’re more likely to refuse your application or offer you higher interest rates (to offset some of the risk involved to them).

What two things should you do if your lender rejects your loan application? 

If you are refused a loan, it’s important to take a step back and find out why this has happened. To get more insight, you should: 

  1. speak to the lender
  2. check your credit report

1. Ask the lender why 

If you’re unsure of the reason why you were refused a loan, you can ask the lender to clarify this for you. Once you know the reason, you can work on improving that area, so you have a better chance of approval next time. 

2. Check your credit report 

Checking your credit report will give you more idea of what lenders can see - and where you can make improvements. You can check your credit report for free without leaving any footprints on it from these credit reference agencies: 

  • Equifax (you can go direct or use CredAbility, which is free for life)
  • Experian
  • TransUnion

You should look for anything that could have affected your credit history and caused your application to be rejected.

How long should you wait before applying for another loan? 

Generally speaking, it’s best to leave at least three months between loan applications – six months would be even better if you can manage it.

It can be tempting to apply for a loan straight away using a different lender, however, this could make the situation worse. Each time you make an application for credit, (whether it’s successful or not), the lender will carry out a hard search on your credit report, which leaves behind a footprint for other lenders to see.

If you suddenly make a lot of applications in a short space of time, lenders might think that you’re desperate for credit – meaning they could be more likely to reject your application. So, the best thing to do is to space out your loan applications to ensure your credit score doesn’t decrease too much from lenders carrying out hard searches on your credit file.

Tip: Use an eligibility checker because this will show you the chance of approval, without affecting your credit score.

Will a declined loan application affect your credit score? 

You might be surprised to hear that having a loan application declined won’t affect your credit score. However, the act of applying (whether you are accepted or not) will leave a footprint on your credit report.

Each hard search can cause a temporary dip in your credit score. One loan application should only make a slight difference, but making multiple applications in a short space of time can have a bigger impact.

Hard searches normally drop off your credit report after a period of 12 months and the effect they have should gradually lessen - if you always pay your bills on time.

How can I build my credit if I get denied? 

If you find out that you were rejected because your credit score is too low, there are things you can do to improve it.

Bear in mind, it’s a gradual process and the time it takes to build up your credit score largely depends on your starting position, which varies from one person to another.

1. Fix any mistakes on your credit report 

Mistakes on your credit report can lead to your loan application getting rejected because the lender cannot verify your identity with incorrect or out-of-date information. Examples of mistakes include: 

  • incorrect address
  • incorrect missed or late payments
  • misspellings of your personal information, like your name
  • the wrong phone number
  • debts you’ve paid off but are still showing as active
  • accounts that have never been connected to you
  • duplication errors, like the same debt being listed twice

You can fix any mistakes by contacting the lender or relevant credit reference agency. Make sure you tell them why it’s wrong and provide them with any evidence to support your dispute (such as a letter from the lender confirming you’ve paid off a debt, for example).

2. Remove any old financial ties 

If you’re financially linked to another person – meaning if you’ve opened joint finances together (like a bank account) – their credit history can also affect your ability to take out credit. For instance, if they have bad credit, then lenders will be able to see this when they check your credit report. As a result, it could put them off lending to you as they may think it’d be too risky.

If you want to remove old financial ties, you can contact the credit reference agency involved and ask them to remove the other person from your credit file. This is called a notice of disassociation. Bear in mind, this can only happen once the account in question is paid off in full.

3. Sign up to the electoral roll 

Lenders want to know that they can easily contact you if they need to. Signing up to the electoral roll assures them that you are who you say you are, and there’s a fixed address where they can reach you, which can increase your chances of getting your loan application accepted.

4. Consider getting a credit builder card 

Credit builder cards are designed to help people with bad or ‘thin’ credit build up their credit score. They also offer an alternative source of credit for somebody who is struggling to get approved for a loan.

By borrowing on this and making sure that you pay it back on time, you could show lenders in the future that you’re able to manage credit responsibly. As with any credit agreement, you should avoid borrowing more money than you could afford to pay back as any failure to repay could cause serious problems for your credit history for up to six years and you may end up paying extra interest and charges too.

5. Set up direct debits 

Setting up direct debits for your bills is a great way to:

  • ensure you pay them on time
  • build up your credit score

Just make sure you have enough money in your account to cover your direct debits. If a direct debit bounces, you could end up damaging your credit score and incurring late fees.

What are the alternatives? 

If you get refused a regular loan and need to access the money quickly, there are alternative forms of credit for you to consider. Which option is right for you depends on your individual circumstances and how much you need to borrow. For example, you could consider (in no particular order):

  • bad credit loan – suitable for those with less-than-perfect credit
  • loan with a guarantor – you’d need to find someone with a good credit score who’s happy to become jointly responsible for the loan
  • loan from friends and family – this could be an option for people who have family or friends who are willing and able to lend them money
  • credit union loan – in order to join a credit union, you need to have something in common with the other members
  • overdraft – for short-term borrowing in small amounts
  • credit card – remember that you can’t always use these to take out cash or transfer the balance

Where can I get debt advice? 

If you’re struggling with debt, consider getting free debt advice instead of taking out a loan. You can get free, confidential advice from Citizen’s Advice or a debt charity, such as StepChange.

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