What To Do if You Are Turned Down for a Personal Loan

While there are many reasons why you may not get a loan, it’s important to understand why you’re being turned down before you make any other credit applications.

Rebecca Goodman, Rhiannon Philps Last updated on 18 November 2021.
What To Do if You Are Turned Down for a Personal Loan

When you apply for a personal loan – whether to pay for home improvements, a new car, debt consolidation or anything else – the lender will check your credit history before deciding whether or not to approve your application.

If the lender thinks you are a high-risk borrower who won’t be able to pay back the loan, it may reject your application.

There can be lots of reasons why this might happen, and here we explain everything you need to know so you can plan your next steps if your application is rejected.

Why was my loan application declined?

Lenders don’t need to tell you why they refused to offer you a loan, which can be frustrating when you’re trying to figure out what went wrong. However, some possible reasons that could explain why your loan application was declined include:

  • a poor or limited credit history
  • too many applications for credit in a short space of time
  • too many existing loans and credit agreements
  • incorrect information on your credit file or loan application
  • insufficient income, suggesting to the lender that you can’t afford the loan
  • your employment isn’t seen as a secure or reliable source of income
  • there are indications of fraudulent activity on your file
  • your finances are linked to someone with bad credit, e.g. you have a joint mortgage
  • you don’t meet the lender’s eligibility criteria, e.g. a minimum income requirement

What to do after you’ve been refused a loan

If you haven’t been accepted for a loan, there are a number of things you can do to increase your chances of getting one in the future.

Check your credit score

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.

You can then contact the credit reference agency and ask for a copy of your credit history, which should alert you to anything out of the ordinary, such as missed repayments or if someone has fraudulently 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 or an error with your personal details. If this has happened, you’ll need to contact the agency and ask it to correct the problem.

» MORE: Understanding personal loan eligibility

Don’t apply for another loan straight away

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. Making a lot of applications in a short space of time will harm your credit score, as it will look like you’re desperate and not in complete control of your finances. Therefore, it’s important not to keep applying if you’ve been rejected for a personal loan.

Pay off any other debts

If you’re in a position to do so, paying off your existing debts could help you to get a loan in the future. Whether you make overpayments on your credit card or pay off an outstanding loan in full, you can improve your credit score and reduce the pressure on your finances.

As a result, a smaller proportion of your income would go towards paying existing debts so lenders may be more receptive to a new loan application.

» MORE: How to pay off debt using the snowball or avalanche method

Improve your credit score

Your credit score could be a reason why your loan application was declined, as lenders view people with poorer credit histories and a record of missing payments as a higher risk.

So improving your credit score could help you to get accepted for a loan. You can build up your score in a number of ways, such as:

  • registering on the electoral roll
  • keeping up with repayments on any other debts
  • making sure the details on your credit score are up to date and correct
  • signing up for schemes such as Experian Boost or Credit Ladder, where you can share information on regular payments you make, such as rent

» MORE: How to improve your credit score

What to consider before applying for a personal loan

Before taking out any credit, it’s important to look at all the costs involved, including interest charged and early repayment fees, to make sure you can afford to repay it.

If you don’t have enough money in your budget to repay the loan, then the lender shouldn’t approve your application. 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 in total – even if monthly costs seem lower for longer-term options.

You can work out how much you can afford to borrow and repay each month using our loan calculator.

You should also consider the criteria of the lender and decide if it’s realistic to get the loan you want to apply for. For example, some lenders won’t accept your application if you don’t have a certain income, or if you have a poor credit score with an individual voluntary arrangement (IVA) or a debt relief order (DRO), but other lenders could be open to people in these situations.

You should always make sure you apply for the loan or credit option, which is most appropriate for you, whether that is a standard personal loan or a specialist bad credit loan. Bear in mind that bad credit loan options will typically come with higher interest rates.

Many lenders will allow you to check your eligibility for a loan without affecting your credit score, so you can see what your chances of acceptance are before applying.

» MORE: Tips for successfully applying for a loan

Alternatives to personal loans

The best way to borrow money will depend upon your circumstances, including your credit score, the reasons for borrowing the money, and your ability to repay your debt.

One alternative to a loan is taking out a credit card. If you do this you should look for one with the lowest interest rate possible and one which you can comfortably repay. There is 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, but these are likely to be very expensive and should be avoided.

Borrowing from family or friends may be another alternative. If you choose this option, make sure you draw up an agreement in writing to try to avoid any disputes over repayments in the future.

You could also consider applying for a guarantor loan. Adding a guarantor, who agrees to pay the loan if you don’t, gives the lender extra reassurance so they may be more willing to approve your application.

If you are a homeowner or you own another high-value asset, you may choose to apply for a secured loan. A secured loan could increase your chances of getting a loan and accessing a better rate of interest, but it comes with the risk that the lender could repossess your property if you fall behind on your payments.

» MORE: What is a secured loan?

Image source: Getty Images

About the authors:

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

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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