Getting rejected for something never feels good but if you’ve been rejected for a personal loan, you needn’t worry: it’ll happen to most of us at some point and doesn’t necessarily mean you won’t be able to get a loan somewhere else.
Before you consider other options, such as a guarantor loan, it could be worth understanding the most common reasons for rejection.
In this article, we’ll look at the main reasons why you might be declined for different types of loan and, where possible, provide advice and steps you can take to stop it happening again.
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%
Why do people get rejected for personal loans
One of the biggest challenges here is that lenders won’t always tell you exactly why you’ve been rejected. That can be frustrating and means that you’ll need to do some research yourself.
Some of the most common reasons for loan rejection are set out below, with detailed explanations for each one under the image.
Related post: Wondering what documents you’ll need when applying for a personal loan? Our detailed guide has everything you need to know.
You might not meet the credit criteria
When deciding who to lend money to, lenders want to write loans to people who will pay them back.
Predicting the future is never easy, so many lenders look at your past to help them to make this decision. If you want to know whether someone will repay a loan in the future, a pretty good (but not perfect) way to predict this is to look at whether they’ve repaid a loan in the past.
So, credit bureaus (such as Experian and Equifax) collect data on borrowers and many lenders base their decisions on what this data tells them. Lenders also factor in other data from credit bureaus, such as whether you have any credit cards, people you’re financially connected with, and how long you’ve lived at your current address.
If you think you’ve been rejected because of your credit report, you could look at an Open Banking lender, such as Koyo. Koyo uses your bank data to offer better rates, rather than basing its decision solely on what credit bureaus say about you.
You could also consider taking some steps to improve your credit score: the Money Advice Service has a great guide.
Lastly, if you have a “fair” credit score, you can take a look at our guide to the best personal loans for people with fair credit.
You might not meet the eligibility requirements
This is a simple one. Lenders have eligibility criteria that you must meet in order to be considered for a loan. For example, you might need to be over 21, or resident in England or Wales. If you don’t meet these requirements, you’ll need to find another provider.
You might not meet the lender’s commercial criteria
Lenders are businesses and, like all businesses, they need to make money in order to stay open. A good lender should make some profit from each loan and sometimes whether a given loan is profitable can depend on the interest rate, the loan term, and the loan amount.
In some cases, a lender might decide not to write a loan because that loan wouldn’t be profitable for them - perhaps the amount is too small for example. There’s not much you can do in this case, but keep in mind that it doesn’t reflect badly on you and, in most cases, you’ll be able to find a different lender who can help.
The lender might not think the loan is affordable for you
A lender won’t stay in business long if it lends money to people who can’t repay the loan in full - and, more importantly, it wouldn’t be doing the right thing for its customers.
Lenders have a duty to lend money only to people who can afford it and, to do so, they’ll usually ask you for your monthly income and your expenses too. They’ll use this to calculate what’s known as a debt-to-income ratio, which is used to establish whether or not you can comfortably meet your repayments.
If you think this might be the reason you’ve been rejected for a loan, it can be worth re-applying for a smaller amount.
There could be a mistake in your credit file
It’s also possible that there’s a mistake in your credit file, which could be holding you back. If you’re rejected for a loan as a result of a search on your credit reference file, your lender should tell you which agency they used for the search.
You can ask the credit agency for a copy of your credit report for free and, if you spot a mistake or any inaccuracies, you can write to the agency to request for it to be fixed. They have 28 days to take action.
Can a personal loan rejection affect my credit score?
Many sources warn that applying for too many forms of credit can affect your credit score, and that’s accurate up to a point: If you’re declined for one loan, and then many more in quick succession, it’s true that this won’t look good to lenders.
However, normal “shopping around” shouldn’t hurt your score.
It’s also worth noting the difference between “hard” and “soft” searches. A soft search won’t make a mark on your credit score - so you can make an application without worrying about your credit history (Koyo is just one example of a lender that uses an initial soft search at the start of the application). A hard inquiry will leave a mark - so you should be cautious about making a high number of searches.
For more on how a personal loan can affect your credit score, take a look at our comprehensive guide.
How can I know whether I’ll be approved for a personal loan?
The only way to know for sure whether you’ll be accepted for a loan is to apply and find out for yourself. However, there are some services out there that will offer a helping hand. For example, Money Saving Expert’s Eligibility Calculator is a free tool which aims to predict the odds of being approved for a given loan.
Again though, so long as you’re looking at a lender who carries out soft credit searches, you don’t need to worry about this - applying for a loan won’t affect your credit history in this case.
Related post: Personal Loans Vs. Credit Cards – Which Is Best For You?
Why is my personal loan taking so long?
It shouldn’t take long for a lender to give you a lending decision. In fact, these days, most providers offer a straightforward application process and a fast decision and, in Koyo’s case, we commit to providing a decision and money in your bank account within 48 hours if you’re approved. Representative 22% APR
Hopefully this article covers everything you need to know about personal loan rejections, but if there’s anything we haven’t answered, please let us know in the comments section below!
Lastly, if you want a broader overview, you can take a look at our guide to personal loans via this link.
Now that you’ve read our article on why a personal loans, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.