Being declined for a loan can be worrying. It shouldn’t be though: it happens to almost everyone at some point - the important thing is how you react to it.
In this article, we’ll look at a couple of different angles, focusing on:
Why you might have been rejected for a personal loan in the first place, and
What you can do about it.
We’ll keep things clear and straightforward, and also look briefly at how lenders such as Koyo, which use Open Banking technology to base lending decisions on affordability, might be able to help. If you want to skip straight ahead to that, you can find out more at www.koyoloans.com - representative APR 27%. If you want to know more though, read on!
5 reasons why you may be rejected for a personal loan
So you’ve been refused a personal loan. Why?
One of the things that makes rejection difficult is that you often won’t be told why you’ve been turned down for a loan.
There are several potential reasons, and although a rejection may seem alarming, in many cases there’s nothing to worry about. In this section, we’ll run through some of the most common reasons for personal loan rejection.
If you want to know a little more about how personal loans work before we get into it, you can take a look at our guide: what is a personal loan?
Your credit score may be too low
Your credit score is a simple “grade” you’re given, based on the strength of your credit history - that is, your track record of repaying loans, credit cards and other forms of borrowing on time.
When deciding whether or not to lend you money, your credit history is one of the key deciding factors most lenders consider - they want people who have shown that they’re able to manage and repay their debts, without late payments, defaults and things like County Court Judgements (CCJs) which act as red flags during a credit check.
So many lenders will decline borrowers whose score isn’t high enough. That’s not necessarily a problem for you, since different lenders have different criteria - so you may still be eligible for a loan from somewhere else (don’t reapply right away though - more on that later).
Alternatively, a better long-term option is to work on improving your credit score (there’s a great guide from Experian here, as well as an overview from the Money Advice Service), to make it more likely that you’ll be accepted for credit in future.
You can also take a look at our guide to loans for people with a “fair” credit score if you want more information on your options if your credit score doesn’t fall into the “good” or “excellent” buckets.
You might not meet the lender’s eligibility criteria
A good credit score is unlikely to be the only thing lenders look for, and you’ll also face other checks. For example, most lenders will only offer loans to borrowers who have been in the UK for a certain period (often 3 years), and while many lenders will offer credit to people over 18, some will have a higher limit. If that’s the case, all you can do is wait, or try another provider.
You might not meet the lender’s commercial criteria
Lenders are companies, just like any other, and they need to make a profit to stay in business. That means that the loans they write need to be profitable, and in some cases - not through any fault of your own - you may not turn out to be a profitable customer (generally because the business isn’t able to charge you a high enough interest rate).
As a result, there’s no such thing as a perfect credit score that will unlock every loan - even the “best” borrowers will be turned down from time to time.
When a lender writes a loan, it wants to be sure that a borrower can afford to pay it back. On the one hand, it can look at whether the borrower has a track record of paying back credit - but even the best intentions won’t help if a borrower will face repayments too big for him or her to handle.
As a result, responsible lenders will look at your income and outgoings when considering whether to offer you a loan, and only offer you what it believes you can easily repay.
If you think affordability may be holding you back (for example if you’re on a low income), the most straightforward solution is to apply to borrow a smaller amount, which you can more comfortably repay.
A mistake in your credit file
Lenders get your credit information from Credit Reference Agencies (CRAs). There are three in the UK:
Those agencies do their best to make sure that their information is up to date, but sadly, mistakes happen. In some cases, this is simply an oversight, and in others, it could be down to fraud.
That’s why each of those agencies allows you to check your score, for free. You can request for any mistakes you spot to be corrected, and the agencies have a duty to do this promptly.
Lenders will disclose which CRA they’re using so that you know which one you’ll need to check.
What not to do if you’ve been refused a loan
If you’ve been turned down for a loan, it’s important not to panic, and to take a moment to think before acting. Here are two things to avoid:
What you shouldn’t do: keep applyingThere’s something really important to bear in mind here: when you apply for a loan or credit card, the application leaves a trace on your credit file, which other lenders can see. A few applications on your file is fine - lenders expect you to shop around. However, a rush of applications in a short space of time can make it look as though you're desperate for credit, which sends a bad signal to a lender.
So if you’re rejected for one loan, don’t suddenly go on an application spree, as this can harm your chances in future.
What you really shouldn’t do: apply for a payday loan
If you’re struggling with a bad credit rating, It can also be tempting to look at a short-term payday loan (defined by the FCA as an unsecured loan with an APR above 1,000% due within 12 months).
This is generally a bad idea: not only is the interest payable extremely high; it can also hamper your chances of getting credit again in the future. Conventional lenders don’t like to lend to people who have taken out a payday loan in the past - again, it’s seen as like the borrower isn’t able to manage his or her finances well.
What you should do if you’ve been refused a loan
If you’ve been refused a loan, you have three options:
Find another lender who can offer you a loan (without firing off too many applications)
Rebuild your credit score and re-apply later
Avoid borrowing altogether
We’ll look at these in order.
Find another lender
As we’ve noted above, it’s important that you limit yourself to just a few further loan applications, to protect your credit report. To get extra protection, it’s worth using an eligibility calculator, such as the one offered by Money Saving Expert, which will help you to work out whether you’re likely to be accepted for a given loan or credit card before you apply.
You can also look at different types of loans - for example, Open Banking lenders such as Koyo use Open Banking technology to safely view your bank account data, allowing them to securely check that a given loan is affordable for you.
This means that they are able to base lending decisions on affordability as well as your credit score, and in some cases, this could mean you’ll have a different outcome if you apply for a loan. If you’re interested, you can see our full guide to lenders who use Open Banking.
Depending on your requirement, a credit card may also be suitable - although you should note that high interest rates on credit cards really add up over the long term unless you pay them off in full each month.
You could also consider things like borrowing from friends and family, credit unions or remortgaging if you’re a homeowner.
Rebuild your credit score and re-apply later
So long as you’re responsible with your money, your credit score will generally increase as you do things like repay debts, avoid missed payments, pay off your overdraft and get on the electoral roll.
In fact, Experian - one of the UK’s 3 credit reference agencies - has a great guide for borrowers, aimed at helping you to increase your score.
It won’t happen overnight, but small steps in the right direction can significantly improve your score over time. And best of all, you can track it, for free. If you’re able to improve your score, you’ll be able to borrow more easily further down the line.
More information: what credit score do you need for a personal loan?
Avoid borrowing altogether
Of course, you might simply find that you can get by without borrowing money at all. Perhaps you have savings you could use, or the purchase wasn’t so essential to begin with. You may also be able to make the purchase in cash by deferring it by a few months, helping you to save money until you have enough to buy it outright.
Does getting declined for a loan affect your credit score?
Strangely, the answer is no. Getting declined for a single credit application won’t affect your credit score, since the credit file only logs the fact that an application was made - it doesn’t differentiate between successful and unsuccessful applications.
However, a spree of applications (for example if you need a loan but keep getting declined) may still trigger alarm bells, so don’t interpret the above as a justification to keep applying for credit even if you’re being turned down by lenders.
Most of us will be declined for credit at some point in our lives. As the above guide shows, the important thing is how you react, and what you do next.
The worst thing you could do would be to panic and go on an application spree. The best thing you could do would be to take a breath, consider why you might have been declined, and adjust your approach accordingly.
And remember, credit scores aren’t the only important factor in a lending decision. For example, Koyo uses Open Banking technology, so that we can base our lending decisions on your real financial situation - rather than what someone else says about you. Find out more at www.koyoloans.com. Representative APR 27%
Hopefully, you’ve found this guide useful, but if you still want to know more, we’ve answered a few FAQs below. And if there’s anything we haven’t covered, let us know in the comments section!
Frequently asked questions about being refused a loan
What happens when you get rejected for a loan?
When a lender decides to reject your application, they’ll contact you to let you know.
They won’t necessarily tell you the reason why they’ve rejected the application, but they will tell you which credit reference agency they’ve used - which means that you can contact that agency directly to check your score and correct any errors that may be on your file.
How can I get a loan after being declined?
There are hundreds of lenders out there, and being declined by one doesn’t mean that there isn’t another lender who might be more suitable.
The thing to avoid is making too many applications, which are visible on your credit file and might look like a sign of financial distress. To help with this, an eligibility calculator can be useful.
I’ve been refused a loan, when can I apply again?
While you can apply for a loan with another provider right away, it’s still worth pausing for a moment and evaluating your options. As we’ve explained above, too many applications in too short a space of time can look like financial distress, making it harder still to get a loan.If you want to apply right away with another provider, there’s nothing stopping you, but if you want to improve your credit score first, you’ll need to stick at it for at least a few months for a meaningful difference.