It may feel like the outcome of getting any loan rests entirely in the hands of the lenders, but there’s lots you can do to try and avoid rejection.
So, you’ve looked at all the options and decided that a loan is the right option for you. Maybe it’s for home improvements, to fund education or to pay for a holiday – but whatever the reason it must mean a lot to you or you wouldn’t be considering going into debt.
Unfortunately, there are a number of things that people do when applying for loans that can mean they find their application is rejected and their plans plunged into chaos.
Here are a few reasons why your loan application could be heading for the reject pile and how to avoid it.
You applied to the wrong lender
Different lenders take different approaches to risk. Some are happy to accept applicants with lower credit scores by simply raising the annual percentage rate (APR) offered. Others won’t accept applicants who do not meet their own set of criteria.
(Read about the different types of lenders and how much risk they tend to take to find out more.)
You can assess how likely you are to be accepted for a top-of-the-market loan by checking your credit score. Your report will give you an indication of whether you can apply for the very best rates available, or if you need to look for more specialist lenders.
However, the best way to check whether a lender is likely to accept your application and offer you their headline rate is to carry out a ‘soft search’. This gives you an indication of how your application would be treated but crucially it does not leave a mark on your credit report, meaning you can shop around and compare lenders. ClearScore uses soft searches for the products we show on the 'Offers' page of your ClearScore account
Your credit file puts off lenders
There are a number of reasons why a credit history might put lenders off. Perhaps you have struggled to manage debt successfully in the past, perhaps you have made a series of applications for credit in a short space of time. Maybe you have simply never used credit in the past, so a potential lender doesn’t know how you handle debt.
By taking some time to improve your credit score you can make it less likely that your application will be rejected or that you’ll be offered a much higher rate of interest.
Of course, it might be that there are mistakes on your credit file, such as debts that you have settled still being listed as outstanding. Checking your file allows you to correct any errors before they affect your application.
Your application is unaffordable
Lenders have a responsibility to make sure their customers can afford any borrowing and that is why they factor in considerations like your income and any existing debt obligations. Look seriously at whether you can afford a loan before applying for one – this may include drawing up a budget, and there are some good tools available online to help you with that.
If you are concerned a loan may be unaffordable then a lender is likely to have concerns too – a rejection can be a wake-up call that your finances need some work.
Think: how much do you spend each month on food, bills, clothing, travel and so on, and how much would your monthly repayments be? If they would bring you right to the edge of what you can afford, then you may need to consider putting off the project you’re borrowing for, borrowing a smaller amount or spreading the debt over a longer period so that your monthly repayments are lower. Bear in mind that if you do that you will pay more interest over the term.
You’re the victim of fraud
Identity theft, whilst extremely rare, is a real and ongoing problem, and it can take would-be borrowers by surprise. All too often the first sign a victim has that something is wrong is when they apply for some form of borrowing like a loan or credit card, and get rejected because a fraudster has been using their identity to access credit illegally.
Checking your credit score before you apply can reassure you that your identity has not been tampered with.
You can’t show you’re in a stable position
Lenders like to know that a would-be borrower is in a stable position, as a way of measuring risk. The more stable you are, the less risky you might be to lend to. These are some of the things lenders look at when trying to assess your stability:
- If you’re on the electoral roll (even if you don’t vote)
This is a way of lenders verifying who you are and where you’re living. It also indicates that you’re living at a steady address.
- The age of your credit accounts
Having at least one credit account that you’ve had for a few years may be seen as a positive sign in the eyes of a lender. This is because it shows another lender has trusted you for a long time.
- How stable is your level of borrowing
If your debt levels are going up and down dramatically, or if you’ve been applying for lots of credit in a short period of time, this may be taken as a sign that your financial position isn’t very stable.
Read our article on the factors that affect your credit score to find out more.
You're financially connected to a bad borrower
That ex-partner with the string of missed payments, or the one who kept dipping into an unauthorised overdraft, could cause you problems in the long run.
If he or she is still financially linked to you, because you have or used to share financial products, then their credit history could affect your ability to be accepted for a loan.
However, if you no longer have those financial connections then you can apply for a ‘notice of disassociation’ to show potential lenders that you are no longer connected to that person. You can do that by raising an enquiry.
What you can do next
Applying for a loan and being rejected can be a real blow and may leave you tempted to turn to a more expensive credit option like a payday loan, an unauthorised overdraft or even a loan shark.
However, that can cost a vast amount more and be a quick route to problems with debt. In short, it’s often a bad idea. If your loan application has been rejected, then it’s a good idea to pause and take stock.
After all, if the lender has refused on the grounds that you cannot afford the borrowing then maybe it’s worth considering whether that is the case. An unaffordable loan is in no one’s best interests.
Whatever you do next, try to avoid continuously applying for credit. A number of rejected applications made in a short period risks damaging your credit score, making it even less likely you will qualify for a loan in the future.
If you’d applied for the loan because you wanted to pay off other debts or cope with bills and living expenses, that could be a sign you’re in difficulties and it might be time to talk to a debt charity such as Step Change.
If you’re genuinely confused as to why you have been rejected, because you know you can afford the borrowing, then you should ask the lender which credit reference agency they used to check your score. Then you can check for mistakes on your report that may have scuppered your application. (Don’t forget that on ClearScore you can see your report for free, anytime you like.)