Being declined for a personal loan may be disappointing especially when you need money for some emergency. Understanding why your application was declined and how should you prepare for applying next – is vital for the loan borrowing process. Here’s a detailed blog to help you know why a loan application is rejected and what could be done to gain control over the situation. ⭐Personal Loans ⭐Financial Tips
Facing financial issues is quite a nightmare. It becomes difficult when an expected emergency knocks on our door and we find ourselves completely “unprepared”. Not every one of us has thousands of pounds lying around to meet the unseen expenses. It is in times like these, we start looking for personal loans, credit cards, overdrafts to arrange for the necessary funds that we need. None of us would ever want to run short of money, but unfortunately, some things are not under our control. And it adds to the problem when our loan application is rejected by a lender. There are several factors due to which your loan application can be rejected. Let us examine them in detail.
Here are 5 top reasons you’re rejected for a personal loan:
1. You do not meet the lender’s criteria
As we know different lenders have different criteria for lending. You may not be meeting the eligibility criteria set by the lender. There are a lot of factors that lenders generally take into account while assessing your profile for the loan. Most common factors that lenders assess are:
- Credit score
- Debt-to-income ratio
- No credit history at all
- Any public record like CCJ, bankruptcy and IVA
- Too many credit checks on your report in a short period
- Foreclosure of a loan
- Delinquent payments
2. Incorrect or inaccurate information on your report
It’s a rare case, but it may happen. Your application may have been turned down despite having a good credit score owing to errors on your credit report. Minute errors may also impact your credit score. Before you apply for a personal loan, scan your report for inaccuracies. Raise a dispute if you find any and get your report updated. You can reach out to any of the three Credit Reference Agencies (CRAs) to get the error fixed. Ensure that you check your report proactively, at least, once a year.
3. High debt-to-income ratio
Debt-to-income ratio is an important factor that impacts your borrowing capability. The ratio reflects the amount that you earn every month and the amount that you pay towards your debts. Lenders check this ratio to determine whether you can afford the monthly repayments if you borrow a loan. If you have a high DTI ratio, then your application has higher chances of getting rejected. Because a higher ratio indicates that you may not be able to service the debts upon approval of the loan. Therefore, the lower the DTI, the better it is.
4. Employment status
Only having a good credit score may not help you get a personal loan. A good credit score does show that you were a responsible borrower in the past. But when lenders assess your profile, they also tend to check whether you will be able to meet the repayments in the future. Your employment status plays an important role in the application assessment process. If you have been switching jobs now and then – it might create a spot in the process. Lenders may consider your profile to be a risk as there are chances that you might lose your job, which will lead to non-repayment of the loan. If you are a self-employed person, it will be challenging for you to find a lender who will not hesitate to lend you money. However, you must be able to prove that you can repay the loan without any fail.
5. Your partner doesn’t have a stellar credit
If you have a joint account with your spouse/partner and you share a loan or mortgage with them – you need to be careful. If your partner doesn’t have a good credit score, it could impact your loan affordability. Because if you are financially associated with someone, lenders will not only assess your profile, they will check your partner’s profile too. Before you apply for a personal loan, end your financial connections and remove them from your credit profile.
Rather than feeling blindsided after getting rejected, try improving your chances to get approved the next time you apply. Remember there are things you can easily avoid doing to help increase the chances of approval. You cannot expect to have control of the situation immediately, however, you may come to a better position to apply again.
Here are 5 super tips to get you back on the track:
1. Find out the reason for your rejection
Find out the reason that led to the rejection of your loan application. There may be a single reason or a whole set. Unless you know why you were denied for a loan, you cannot work towards improvisation. The best way to know is to review your credit report. It will give you a clear idea about the reason you’re not getting approved for any financial product. Whether it is a low credit score, too many late repayments, any delinquent account – you won’t know unless you get hold of your report.
2. Fix the issues that can be done immediately
Now that you know what went wrong – prepare a plan to get it fixed. Somethings may take time to get sorted while some of them can be done quickly. Suppose, you find an error on your credit report, due to which you were rejected. Contact any CRAs to get it fixed. Such issues do not take much time and it’s pretty easy to reach out to these CRAs. Similarly, if you find that due to too many debt accumulations, you were rejected – work towards repaying the debt.
3. Do not reapply too soon
Space out your loan applications. When you apply for financial products frequently, they leave a dent on your report. Too many applications in a short frame may indicate that you are desperate for getting access to loans. Recent enquiries must have lower the credit score by a few points. Take some time to rebuild your credit score by repaying your debts in full every month or by keeping your credit card usage low. Work to strengthen your finances by paying off your loans or fixing the underlying problems — which could boost the chances of acceptance in the future.
4. Reapply to another lender
As mentioned above, different lenders have different lending criteria. You may not fit into someone’s box but there may be someone out there with a size of the box that fits you. If you feel that your report is as good as it can be, you don’t have to pause before you apply again; go find another loan provider. For home and car loans, it’s safer to apply for a loan in a period of 30 to 45 days. Talk to the lender and understand their eligibility criteria before you apply to them for a personal loan. Lenders will be glad to explain what matters the most to them on your profile and when can you reapply again so that you do not hurt your credit score.
5. Use a guarantor
When your credit profile can not be accepted, you may have a better shot when you apply with someone who has a better credit profile. You can use a guarantor for your loan application. A co-signor will be responsible for the repayment if you cannot keep up with it. The lender has the right to take legal actions against you and your guarantor. Hence, choose your co-signor wisely. And the co-signor should also understand their responsibilities and risks involved.
The Bottom Line
Do not give up easily if your application gets rejected. You may have to put in a little more effort to make things work in your favour. Researching about the lender that you are about to deal with may save you from rejection. Identify the underlying issues in your credit report and fix them. After the rejection, you get drawn towards lenders who guarantee loan approval for people with bad credit score with no credit check. If you choose to deal with any such lenders, you will be putting your finances in danger. No FCA authorised lender in the UK lends money without performing a credit check on your report. Recognise the possible signs of a loan scam and spot the right lender.