What to do if you are turned down for a personal loan
There are many reasons why you may not get a loan and it’s important to understand why you’re being turned down before you make any other credit applications.
Suppose you’re looking to get a personal loan, either to pay for something such as home improvements, a new car or to consolidate other debts. In that case, the lender will check your credit history before it decides whether or not to approve your application.
If it thinks you are a high-risk borrower and won’t be able to pay back the loan, it may reject your application and turn you down.
There can be lots of reasons why this might happen and here we explain everything you need to know if your application is rejected.
The reasons why you might not qualify for a personal loan
Whenever you apply for credit, your credit file is checked by the lender. It assesses if it thinks you will be a borrower who will repay the loan or not, based on your credit report.
If you are rejected when you apply for a personal loan, the provider should tell you the name of the credit reference agency it has used, although it doesn’t have to give you an exact reason as to why it’s come to this decision.
You can then contact the credit reference agency and ask for a copy of your credit file, which should alert you to anything out of the ordinary, such as missed repayments or if someone has used your personal details to make an application for credit.
You can also check your history to see if it includes any mistakes, such as an incorrect payment. If this has happened, you’ll need to contact the agency and ask it to correct the problem.
How to increase your chances of being approved for a loan
Every time you make a credit application, whether you are approved or not, the credit check by the provider makes a mark on your credit file. If you make a lot of applications in a short space of time this will impact your credit score negatively as it will look like you’re looking to take out credit you can’t afford to repay. Therefore, it’s important not to keep applying if you’ve been rejected for a personal loan.
Instead, look at other ways in which you can improve your credit score. Some options to consider include registering for the electoral roll, keeping up with repayments on any other debts, and making sure the details on your credit score are up to date and correct.
What to consider before applying for a personal loan
Before taking out any credit, including a personal loan, it’s important to look at all the costs involved, including interest charged and early repayment fees. It’s also important to look at the length of the loan, as usually the longer it is set for, the more expensive it will be.
A personal loan could be a cheap way to borrow money, but if you can’t afford to repay it, it can also lead to unmanageable and expensive debt.
Personal loan options if you have bad credit
The best interest rates on personal loans will always be reserved for those applicants with good or excellent credit histories.
However, if you have a less than perfect credit history, it is still possible to get a personal loan, and some lenders specialise in this area. The major downside is that interest rates will be higher and so you’ll pay more overall to take out a loan than an applicant with a better credit score.
If you have a poor credit history it is also particularly important that you are confident that you can afford your repayments before taking out any loan. Making late repayments or missing them altogether will only worsen your credit score and exacerbate any existing debt problems you might have.
Alternatives to personal loans for borrowing money
The best way to borrow money will depend upon your circumstances. This includes your credit score, the reasons for borrowing the money, and your ability to repay your debt.
One alternative is taking out a credit card, and if you do this you should look for one with the lowest interest rate possible and one which you can comfortably repay. There’s no point, for example, taking out a card with a high interest rate that you can’t clear each month as you’ll end up paying out a lot in interest charges.
Most of the cheapest rates for personal loans and credit cards are reserved for those with good credit scores. If you don’t have a good credit history, it may be tempting to take out a payday loan which can be expensive but choosing a lender such as a credit union could be a better choice.
There are also free debt advisors at debt charities, including StepChange, who can offer help if you’re struggling with debt and can arrange repayment plans for you.
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Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more