Being denied for a personal loan you need is extremely stressful. Take a deep breath: Loan denial can happen for many reasons.
Getting rejected for one personal loan doesn’t necessarily mean you’re permanently barred from all credit.
It’s important to understand the possible reasons for personal loan denial in order to address them and improve your chances of a successful application in the future.
Common reasons why a personal loan application is rejected
If you’ve been rejected for a personal loan in Australia, there’s a good chance it’s because of one of these common reasons.
1. You didn’t meet basic requirements
There’s a minimum application criteria you need to meet to get approved for a personal loan. For example, you must:
- Be at least 18 years old.
- Be an Australian citizen, permanent resident or hold an eligible visa.
- Live in Australia.
- Meet income requirements.
- Prove a regular income.
- Be in good credit standing.
- Not be in the process of bankruptcy.
How to recover: Ensure you meet the eligibility requirements you understand. Others — such as what ‘having a good credit rating’ means — can be difficult to determine without specificity. Always have a conversation with a bank before you apply for a loan.
2. Your application contained errors
A bank may deny a loan if you missed any key paperwork or included out-of-date information on your application.
How to recover: Check your documents for errors or old information.
3. Red flags in your credit history and report
The most common reason for a rejection is a low credit score or bad credit history. Managing your finances will show the lender you’re ready to take on a personal loan. If there are defaults and overdue payments on your credit report, they’ll negatively influence your ability to secure a loan.
How to recover: If your credit score is below average, dedicate the next three to six months to repairing your credit. Pay all your bills and credit card by the due date. If possible, pay more than the minimum amount. Avoid any credit applications during this time.
4. An inflated income-to-debt ratio
You might have a strong credit score but you’re currently dealing with a lot of debt. Maybe you’ve recently secured a mortgage or car lease, so another loan might be too big a responsibility – particularly if you don’t have savings.
How to recover: Build up your savings by putting away a percentage of income every month. Increase your savings and pay down credit to improve the income-to-debt balance.
5. You requested an unsuitable loan amount
If your income isn’t high enough or you have other debt, the personal loan figure you applied for might have triggered a rejection. Look at both your income and expenses to determine what you can afford to repay.
How to recover: Reconsider the loan amount. If you applied for a $20,000 personal loan, would $10,000 be enough? Asking to borrow less might result in a better outcome.
6. Your employment isn’t stable
Even with a strong credit profile, low or no debt, and savings, if you’re hopping from one bank to the next, they might see you as a risk. Banks are more likely to approve a loan with an applicant with stable income and employment.
Under Australian law, banks must check that loans are suitable for consumers. These protection measures are in place to avoid getting in over your head in debt.
How to recover: Don’t switch jobs before or during a personal loan application. If you need more income to demonstrate you can repay a personal loan, consider negotiating a pay rise with your current employer or create a new stream of income with a side hustle.
General tips for recovering from a personal loan rejection
Spend time understanding why your application was rejected. Check your documents for errors or old information.
If your credit score is below average, dedicate the next three to six months to repairing your credit. Pay all your bills and credit card by the due date. If possible, pay more than the minimum amount. Avoid any credit applications during this time.
Build up your savings by putting away a percentage of income every month. Increase your savings and pay down credit to improve the income-to-debt balance.
What to do next: Compare, prepare & consider alternatives
As a general guideline, it’s best to wait at least three months before you apply for another personal loan. Banks and lenders report to credit agencies regularly. You can access a free credit report every three months.
Use this three-month period to decide if a personal loan is right for you. Compare personal loans after you’ve spent three months repairing your credit – you’ll be able to access more competitive products.
Talk to your accountant and or a financial counsellor about your specific situation. If the loan is for house updates, reach out to your mortgage provider to discuss your options.
Discuss the possibility of adding a guarantor to the application or accessing a private loan through family or friends. Depending on how much money you need, you could work with a financial coach to strategise saving it over the course of a year.
With your improved financial position, talk to different banks and lenders. Leverage new customer promotions, with the best deals offered for the first 12 months.
Remember, it’s not the end of the world if you’re rejected for a personal loan. It might be a blessing in disguise – that could save you thousands, now and in the future.
Frequently asked questions about personal loan denial
It depends on the reason for the denial. Get your latest credit report, talk to the lender about why they didn’t approve your application, and spend three to six months improving your financial situation before you reapply.
No, a loan denial doesn’t impact your credit score. However, when you apply for a personal loan, the lender requests a credit enquiry, which is recorded in your history and could result in a temporarily lower score.
DIVE EVEN DEEPER
It’s harder, but not impossible, for Australians with a low credit score to be approved for a personal loan. You may have fewer lenders to choose from, and the costs may be higher.