No one likes being rejected for a loan, but there are steps that you can take to deal with this setback. We reveal how to move forward after a loan rejection and how becoming a wiser borrower can improve your chances of being successful.
First, we need to understand why personal loan applications are rejected.
Loan applications are frequently rejected because the credit score of the borrower is assessed as low. Read our article on what is credit and why it matters to better understand this. We will cover how to improve your credit score in a moment.
However, low credit scores are not the only reason lenders reject loan applications.
Reasons why you may be rejected for credit.
1. Limited credit history: If a lender is unable to establish a strong credit history, they may lack the information and reassurance to agree to lend.
2. Identity and address: Leaders must be able to confirm your identity and address. If you are not registered on the electoral roll or if you have changed your name or relocated recently the lender may be unable to confirm these essential details.
3. Financial associations: If you have a joint account or apply for credit with someone who has a bad credit history, this can deter potential lenders.
4. Employment history: This information is not included in your credit report however some lenders may check recent employment and salary details for an indication of financial stability.
5. Affordability: You may have a lot of outgoings compared with your income, indicating a risk of future defaults on credit repayments. Most lenders will now request an open banking link so they can better understand your regular expenditure from your bank statements.
6. Too much debt: If you have a debt-to-income (DTI) ratio which is over 40%, you may have difficulty finding a loan. A DTI of less than 20% is preferable.
7. Multiple credit applications: Lenders may consider this to be red flag as it can indicate that you are over committed financially.
8. Late or missed repayments: If previously agreed loan or credit card repayments are late or missed this can indicate financial stress and an inability to repay existing commitments. County Court Judgements (CCJ’s), IVA’s and Debt Management Plans (DMP’s) are of course a more conclusive indication of this risk.
9. Errors in your credit report: for example, an inaccuracy in reporting loan repayments or the status of County Court Judgements (CCJ) which may have been settled.
10. Target groups: It may be that this is not the loan for you. Lenders often have a specific customer profile in mind for example, targeting only individuals in high income brackets.
Hopefully, this gives a better idea of why a loan application may be rejected. The following points can help remedy certain issues, so your loan application has a better chance of being approved.
Improving your chances of being accepted for credit.
1. Regularly check and understand your credit report
If you feel the problem lies with your credit report, then now is the time to check it for errors or out-of-date information. Even minor mistakes can impact how a lender scores risk. There are no penalties for checking your credit report, this is completed by a “soft” search. A “hard” search is when lenders review the report once they receive a loan application.
To check your credit report, you can contact one of the three national credit reference agencies Experian and Equifax. The credit reference agency will ask for your full name, contact information, national insurance number and date of birth.
It’s important to check your credit report on a regular basis to ensure its accuracy. Look out for inaccuracies in your report such as active loans which have been fully repaid, payments shown late or missed, previous judgments such as County Court Judgements (CCJ’s) or IVA’s which are settled but not shown as satisfied.
You can request that inaccurate or incorrect information is either removed or amended by submitting a dispute online, over the phone, or by letter directly to one of the three main Credit Reference Agencies
2. Improving your credit score
A high (good) credit score equals a lower risk for lenders. It also means you will normally be offered a better interest rate on your loan.
Find out how your credit score is calculated.
If a loan application was rejected because of a low credit score, there are several steps you can take to improve your credit score:
i) Get a credit card
Using a credit card sensibly demonstrates that you are a responsible borrower and creates a big tick on your credit score. Ensuring the balance is paid in full every month builds a good credit history and maximises the benefits to your finances. Do not withdraw cash from your credit card unless it is an emergency.
ii) Avoid defaulting on regular credit repayments
Manage your weekly or monthly budget to ensure you have sufficient funds to meet your regular direct debits or standing order commitments. If you are struggling to make a loan or card repayment do not ignore it contact your lender to discuss options.
iii) Close old accounts
Shut down any dormant, unused bank accounts, store credit accounts and credit cards as your credit reference agency will factor these into your score if they remain open.
iv) Keep credit utilisation low
Specifically, we mean keeping your credit card balances low throughout the month. This shows you are responsible and measured in your financial actions which reflect well on your credit rating. For example, if you have a credit card limit of £2,000 and you spend £1,500 your credit utilisation on that card is 75%. This will negatively impact your credit score so if possible, try to keep credit card utilisation at 25% or lower.
v) Register to vote
Registering to vote at your current address will benefit your credit score. This can be done by registering on the electoral roll at your address even if you live in a shared house or with parents.
vi) Don’t make too many credit applications
Each application for credit leaves a footprint on your credit file, so apply cautiously to keep your credit score healthy.
vii) Make sure your name is on household bills
Check that your name appears on household bills at the same address. If it does not, you’re probably missing out on boosting your credit score.
3. Removing a partner’s defaults from your account
If you have previously applied for a joint credit agreement for a loan or mortgage your partner might be viewed as a “financial associate” meaning a prospective lender will often take their credit rating into account when making their decision on your application. Therefore, if your partner has a poor credit history, this can negatively impact your credit score and your chances of securing a loan.
To remove this financial link, you need to close the joint account if it is still open and ask the credit reference agency to place a notice of dissociation on your credit report.
Even following a divorce, you may still be financially linked to your ex-partner until your shared account is closed.
4. Consider other lenders
There are many lenders to choose from and they all have different business models and different criteria for assessing borrowers. There is always the option of researching another lender that could support your requirements.
It may be worth considering becoming a Credit Union member. Credit Unions like GMB carefully consider loan flexibility and affordability as their members’ needs are always front of mind. A good example of this at work is the GMB Family Loan which is repaid using Child Benefit. The Family Loan gives GMB members with lower credit scores access to an affordable, revolving credit facility.
Learn more about GMBCU’s fast, fair, flexible loans designed to fit your personal circumstances and most importantly very affordable.
And if you have any questions about a recent loan application, call us on 0161 486 1777 or send an email to email@example.com.