Tips for Successfully Applying for a Loan
Some common reasons why your personal loan application might be rejected can be easily rectified. Use the tips in this guide to help make your application as strong as possible.
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 too many times in a short space of time, or even something as simple as making a mistake on your loan application.
In some cases, these can potentially be 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 want to buy without taking out a loan, it might be better to do so in the long run. If you can’t afford something up front, work out how long it will take you to save up the money you need by budgeting.
Even if you do decide you need to take out a loan for your purchase, careful budgeting will help you figure out exactly how much you can afford to repay each month.
» MORE: How to budget your spending
2. Do your research
Take the time to research the market and explore the range of credit options available to you. This can help you learn the basics of borrowing and whether a loan is the right form of credit for the goods or service you would like to buy.
Try to decide what type of loan you are looking for and whether you are eligible before applying to a lender. For example, you may prefer a secured loan, where lenders will require some form of security in case you fail to repay the loan, or an unsecured loan (also called a personal loan), where you simply pay off the loan each month.
3. Check your credit score
Your credit report has a significant 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.
» MORE: What is a credit score?
Checking your statutory credit report through a credit reference agency is a free, quick and simple way of working out how lenders might view your application, though it can’t guarantee approval.
» MORE: Checking your credit score
Your credit score is calculated using data from your credit report and will help give lenders an idea of your borrowing power. Some credit reference agencies may charge a fee for access to your full credit report and score.
Typically, the higher your credit score the more likely your loan application is to be accepted, and the better terms you’ll receive. Although other factors will come into the decision making process, like your income and the affordability of the loan itself. Loan providers reserve their best deals for those with excellent credit ratings.
» MORE: What is a good credit score?
4. Build up your credit history
A poor credit history is one of the most common reasons why a lender might reject your loan application. This is because it suggests you may not manage credit arrangements well.
If this is the case, you could start to build up your credit history by making small transactions on a credit card and repaying them on time. This could help build a score that shows you are a reliable consumer when it comes to managing debt.
If you have a poor credit history, there are many ways you can improve it. Start by paying off outstanding bills and reducing any other debt you do have.
» MORE: How to improve your credit score
5. Review open credit
If you already have several credit cards or other loans, you may be denied a further source of credit. Having multiple credit streams available to you could make lenders uneasy, as they may fear you could get into unmanageable levels of debt during your loan term.
6. Compare lenders
Comparing lenders is a simple way to boost the chance that your loan application will be approved by matching you up with the right provider.
NerdWallet’s comparison table allows you to check if you are likely to be accepted for a particular loan by clicking ‘check eligibility’. This could save you from being rejected by a lender and give you an idea of whether you might be offered a loan.
Checking your eligibility in this way carries out a ‘soft’ check, which won’t leave a mark on your credit file.
» COMPARE: Personal loans
7. Double-check your application
A small mistake or discrepancy on your loan application can result in rejection. Make sure you enter all information accurately, including your address, date of birth and residency status to allow your application to progress.
8. Space out credit applications
If you are rejected for a loan, think carefully before you make another application. 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. Your desire for credit will send a red flag to lenders about your ability to manage your finances responsibly.
It is best to limit your credit applications to less than two or three in a three-month period.
WARNING: Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up with repayments.
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
Joel Kempson is a personal finance expert and writer at NerdWallet. He has previously written for Money.co.uk and Uswitch, as well as being quoted in the Daily Express, The Mirror and The Sun. Read more