Tips for Successfully Applying for a Loan
There are many common reasons why your personal loan application might have been rejected, and most are easily rectified. Before applying for a loan, make sure your application is as strong as it can, using the tips in this guide for help.
Whether you are applying for a personal loan for the first time and you want to know how to boost your chances of being approved, or you have been rejected for loans by providers before, this guide can help you understand how to successfully obtain finance.
If you have been rejected for a loan before, that doesn't mean you can't successfully apply for a loan in the future. Common reasons for rejection include a poor or limited credit history, applying for an unrealistic amount, or even something as simple as making a mistake on your loan application.
In many cases, these are easily fixed. But even if the fix requires more effort, the sooner you start addressing any potential issues, the sooner you can access the finance you need.
Top tips for successfully applying for a personal loan
1. Review your finances
Before you even apply for a loan, make sure you need it. If you can afford what you wish to purchase without taking out a loan, it might be better to do so in the long run. Consider saving or asking friends and family if you can borrow money, if you have the option, before taking out a loan.
2. Check your credit score
Your credit score has a huge impact on your loan application and whether it is successful or not. It informs lenders of the risk that lending to you presents to them, which is how they will decide how much they are willing to lend to you and if they are willing to lend to you at all.
The higher your credit score the more likely your loan application is to be accepted, and the better terms you’ll receive. Loan providers reserve their best deals for those with excellent credit ratings.
If your score is low, consider rebuilding your credit rating before applying for a loan.
When choosing a loan make sure you’re confident that you can afford the repayments before proceeding, because when you miss repayments you could damage your credit score.
3. Research the loan market
When looking to choose a personal loan, carry out extensive research to understand what options are available to you in the loan market.
Before you contact your bank or another loan provider, understand what type of loan you are looking for, the interest rates you can afford and the term in which you will comfortably be able to repay the capital borrowed and any accrued interest.
4. Double check your application
The tiniest mistake or discrepancy on your loan application can result in difficulties, or even rejection. Make sure you enter all information as accurately as possible, including your address, date of birth and residency status to allow your application to progress.
If you are caught lying about any detail included in your loan application you could be blacklisted by loan providers.
5. Space out credit applications
Making many credit applications over a short time period can send warning signals to lenders. This is because credit applications leave a visible mark in a consumer’s credit report. These signposts are left when a lender performs what is known as a hard credit check on your file.
A hard credit check is usually carried out by a lender when you submit your application and it will reveal to the lender all the details in your credit file. This includes how you have managed debts in the past and any missed payments. The lender will use this information to decide if you are a worthwhile risk, when they consider whether to lend to you or not.
The more hard credit checks a lender sees on your file over a short time period, the more unlikely they are to lend to you, as your desire for credit will send red flags about your ability to manage your finances responsibly.
It is best to leave about six months between loan applications, as hard credit checks tend to lose their impact after this period.
Why has my loan application been rejected?
It shouldn’t be a mystery why your loan application has been turned down. There are many common reasons shared by providers, despite their different lending criteria, unfortunately you might not be told exactly why. But hopefully with our checklist below you can identify.
Here are some of the top reasons why a loan may have been rejected, and what you can do to rectify it.
Poor or limited credit history
A poor credit history is one of the most common reasons that loan applications are denied. This means you have not managed previous credit arrangements well. Start by paying your bills on time and reducing any debt you do have. You can also improve your credit by making small transactions on your credit card and repaying them on schedule.
Being denied because you have limited or no credit history will need to be addressed in a similar way. Seek smaller forms of credit to build a score that shows you are a reliable consumer when it comes to managing debt. Also check other factors like that you are on the electoral role and your address history is correct.
Having too many open lines of credit
If you already have several credit cards or another loan, you may be denied another source of credit. Having multiple credit streams available to you could make a lender jittery, as they may fear you could get into unmanageable levels of debt during your loan term.
Application error or discrepancy
When reviewing your application, lenders will verify the information you have provided. Incorrect details, such as your address or residency status could lead to your application being rejected outright.
It’s therefore worthwhile to double check your application for errors, inaccuracies or inconsistency. Read it back to yourself out loud, or get a friend, relative or partner to check it is accurate and up to date.
If you regularly change jobs and your employment history appears to be turbulent to lenders, they might refuse to lend to you. They might feel (rightly or wrongly) that your employment situation means you can’t regularly afford loan repayments.
Lenders have different risk levels they are willing to consider. Some lenders may be particularly strict about employment requirements, specifying that you need full time employment with a minimum salary.
Others, however, will be more open to borrowers with multiple income streams, freelance careers, the self-employed and employment that differs from the norm.
You applied for an unsuitable loan
Different loans have specific uses as, for instance, you can’t take out a personal loan to cover the costs of another loan, such as a mortgage. And if you apply for a loan which is unsuitable for your financial circumstances, you might be turned down.
You could have applied for a loan in which the lender thinks the timeframe for you to repay based on your salary is unrealistic. So, before you apply, make sure the loan is suitable for your needs and your current financial situation.
Find the loan that is right for you
Compare loans with our comparison table to find the best deal for your circumstances. When you apply for the most suitable loan you’ll be more likely to be accepted.
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more