Find Out Why a Loan Application Is Rejected, and What You Can Do Next

It’s a cruel fact of the loan world that those most in need of money are the most likely to be rejected. That’s upsetting, but it happens for very good reason. Responsible lenders must be sure that your loan is affordable.

Why Are Some Loan Applications Rejected?

Loan applications are normally rejected because you have a history of struggling to repay your debts, or you've failed an affordability check, and the lender isn't confident you can make the contractual payments. A guarantor loan could help.

Only lenders know the very specific decisions that are made during loan applications, but if yours is rejected then it’s usually because of a failed affordability check or a poor credit rating.

They should do what they can to ensure that you can pay the money back. You should be able to make repayments without struggling to pay for the essentials.

Continue reading to get the full nitty-gritty details about why loans are rejected and if that has happened to you, what you can do next.

Looking for other information on Loans? This guide has info on 'Why some loan applications are rejected? We have also writen extensively about:

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Loan affordability assessments

Lenders have a responsibility to make sure that loans are affordable. This means that not only can you pay the money back, but you can do so without having to skip meals or struggle to pay essential bills.

Affordability checks include an evaluation of your income and your expenditure. Every lender sets their limit at a different level, though the end result is to make sure that your income is significantly higher than your spending.

Affordability checks should also consider your existing debt levels. Usually, this is measured as your debt-to-income ratio. If your total amount of debt is above a certain percentage of your yearly salary, your loan will likely be rejected.

Lenders should only approve your loan application if it won’t cause financial struggles, leaving you in a debt spiral where you need to borrow more in order to repay existing debts.

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Credit Files and Credit Scores

Your credit file is a record of your financial history. It shows your debt, how consistently you make payments and the length of your relationships with banks as a customer. Your credit file is a detailed record, but it’s summarized by your credit score which is a three-digit numerical figure.

Your credit score shows, at a glance, how financially responsible you are. A low score shows that you might have missed payments or taken too much credit, whilst a higher score is usually a sign that you’re managing your money successfully.

Your credit file, and score, are fluid and always changing. Your score changes according to your recent financial actions, so you can improve your credit score by making sure that you make your payments on time.

Making Multiple Loan Applications

If you’re rejected for a loan, don’t keep applying for more. When lenders check your credit file, they leave a mark to show that they’ve searched it. The next time you apply, this mark will show when a new lender checks your credit file.

Applying for multiple loans in quick succession is a sign of desperation for money. It shows that you’re trying to get a loan anywhere and everywhere. Lenders can’t see if other loan applications have been approved or rejected, but usually they’ll make one of two assumptions with neither of those being positive.

Either you’re being rejected for other loans, which doesn’t look great to a lender, or you’ve been approved and you’re probably taking on a lot of debt in a short time.

If you’ve faced rejection during loan applications, take a break for a few months. This is usually long enough for those searches to fade from your credit file.

If you want to search for loans without leaving marks on your credit file, look for direct lenders and comparison sites that offer to run a soft search. Soft searches don’t leave the same marks on your credit file, and usually lenders can tell you if they’re likely to approve your application.

Lenders will still need to run a hard search before they approve your loan, but by then you should already know that your application will likely be successful. If a lender rejects you after a soft search, you’ll know not to take it any further.

What Lenders Are Looking For

Contrary to popular belief, lenders don’t always want customers with the best credit scores. A customer that makes all their payments on time, or even repays their debt early, isn’t a profitable prospect.

Lenders make money from the interest and fees that they charge. Often the best customers are those that miss payments but eventually repay their debt in full, with all those extra charges added on.

A bad credit score is a sign that you may not ever repay your debt in full. You’re likely to default on your loan, may seek interest-free repayments or might even end up going bankrupt. If you manage your money very badly, lenders might get back a lot less than they originally gave you.

Poor credit scores are a sign of risk. Excellent credit scores are a sign that you’re not enough of a risk, and that you’re likely to end up paying back just a little more than you borrowed. Meanwhile, if your credit score is somewhere around or slightly above average, you’re often the most profitable customer for lenders to approve.

It can be difficult to see what lenders really want, and what they’re actually looking for. Small tweaks to your credit file can alter your chance of approval.

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Different Credit Referencing Agencies

There are three different credit referencing agencies in the UK. These are Equifax, Experian and TransUnion. Each agency holds its own credit file, and your three files aren’t the same. Different companies report to different agencies, so information on one file may not show on another.

In most cases, your credit score will be roughly the same with each provider, even if the numbers are different, due to the scales used. Sometimes, small differences can make for very different approval rates. It’s worth checking all three credit files, and trying to see which lenders use which referencing agencies. You might be rejected by a lender based on your Experian file, but could be approved by another if they use TransUnion.

According to a combined average from all three providers, most people fall in the Fair to Poor range of credit scores, rather than Good or Excellent.

Sources: Which - The Guardian - Totally Money

Lack of Credit History

A lack of credit history can damage your chances as much as a poor credit score. Lenders want to see how you’ve managed your money historically, so having no clear evidence of any borrowing can be a negative thing.

If you don’t have a credit history, now is the time to start building one. It’s rare for an adult not to have items on their credit file, but if you’ve never borrowed in the past then it’s important to start building your credit file.

Don't worry about taking on large amounts of debt. Even smaller things can contribute to a strong credit file. Instead of using a PAYG mobile, take out a contract and pay your bill on time every month. Consider paying your car insurance monthly instead of annually, even just for a year, or take out a credit builder car and use it for your groceries each week. You can repay your credit card balance straight away, so you don’t really need to get into debt.

Also check that you’re on the electoral roll. This is another factor that contributes to your credit file and score.

Finding Responsible Lenders

When your loan application is rejected, it’s for a good reason. Of course, a rejected application can be disheartening and leave you feeling stranded.

Always make sure you apply for loans from responsible lenders. Use the Financial Services Register to look for regulated companies.

If your loan application has been rejected but you really need emergency cash, why not check our other guides for alternatives to bad credit loans? Your options might include finding a guarantor, getting government assistance or securing a loan against your vehicle.

If you’re already in a lot of debt, you can also get help from a debt management company.

Quick Loan FAQs

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How Can Money Savings Advice Help You With Getting a Loan?

Here at Money Savings Advice, we have partnered with some of the UK’s leading loan broker companies. They have already helped thousands of people get the best loan that suits their needs, and they can do the same for you.

Choosing an independent loan broker means they won’t proceed with an application unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these loan brokers who can help you get a loan, then click on the below and answer the very simple questions.