Applying for a personal loan is simple enough and you can breeze through the whole application in just minutes. The catch is that some lenders may turn you down if you don’t look like their idea of a perfect customer.
We’re going to look into the mysterious rules (‘acceptance criteria’) which lenders use to decide whether to accept your application, to help give you the best chance of getting a loan which is right for you.
How lenders make decisions
The first thing to remember is that lenders want to say ‘yes’. When you borrow from a lender they charge interest and that’s the basis of their income. However, in some cases, customers don’t pay lenders back, either because they don’t want to or because they can’t afford to. When this happens, the lenders lose money on the loan - the key to being a successful lender is to work out which customers they can trust.
To work out how likely you are to repay your loan, lenders will look in detail at your income, where you live, how much you want to borrow and what it’s for. They’ll also check if you’ve borrowed money before to see if you paid it back on time and in full. The good news is that each lender scores applications differently, so if you are rejected by one lender, that doesn’t mean you won’t be accepted by another.
Turned down for a loan?
Being turned down for a loan is never the nicest thing to happen to you, but when lenders don’t give you a reason, it’s even harder. So what are the main reasons for being turned down for a loan? Find out in our guide:
Your credit file
Your credit file shows lenders how you manage your money and in particular, how you have coped when borrowing cash in the past. This can include current or previous personal loans, credit cards, bank accounts, overdrafts, phone contracts and insurance. If you’ve had trouble keeping up with repayments, it’s likely that you’ll find it more expensive to borrow, as you will be classed as ‘higher risk’.
What details are in my credit file?
- Current address
- Previous addresses
- Electoral roll (whether you register to vote)
- Who you’ve held/hold joint bank accounts with
- Who you’ve lived with
- Arrangements you’ve made with previous lenders
- Legal problems and court judgements against you
Have a good look over this list and you might be able to work out why it is that you have a good or bad credit score. It could be that an old housemate has gone bankrupt or that you have moved house a lot for work. A bad credit score may not be related to problems with your money management skills, but it might help to look at alternative loan options, such as guarantor loans, where a friend or family member supports your application.
Too many loan applications
If you’re having trouble getting a loan and you’re desperate for cash, it might be tempting to send out loads of applications in the hope that one will get through. However, every time you complete an application (subject to your consent), this will show up on your credit file as a ‘search’. Lenders don’t like these searches on your credit file - their calculations show that this ‘footprint’ makes you a higher risk.
So the more applications that you have rejected, the more likely you are to get rejected again! This spiral into dangerously-bad credit mean you will end up paying a higher APR for a higher risk loan, if you are successful in your search. One way to snap out of this spiral is by asking a friend or family member to be a guarantor, but if you don’t keep up with repayments, this will then affect both of you.
Choose Wisely won’t leave a footprint on your credit record when you’re searching for a loan, and you can choose between lenders based on which one you think will be likely to accept your application. If you get turned down a few times, consider leaving it a few months before sending off another application so that lenders know you’re just broke and desperate for cash.
Understandably, lenders need to know how much you earn, as they need to know you will eventually be able to pay them back. Before you apply for a loan, have a look at the repayments and make sure that you will be able to pay them back in full and on time. If you can’t afford a loan, then you will need to think again, especially if you’re already in debt. You can get free debt advice from the Money Advice Service- the worst thing you could do is end up owing even more money by defaulting on a loan.
Mistakes on your credit file
Errors on your credit report can and do happen, so if you’ve been rejected despite having a reasonable or good credit history, it’s worth making sure there are no mistakes on your credit record. To do this, you can use ClearScore or Noddle for free to look carefully at your file. If you see any mistakes or information you don’t agree with, remember that you have the right to get it corrected. Your first step is to get in touch with the lender involved and ask them to change the entry. If this doesn’t work, you can add a ‘notice of correction’ to your file - this should be no more than 200 words long, giving the facts about the mistake.
Every single lender has their own personal set of acceptance criteria. While you might pass for one, you may not for another. Make sure you check the lender’s criteria (on their lender page and their website when you click through), before making any applications. A good start would be to complete a Choose Wisely Eligibility Check. This will provide you with a list of suitable lenders that you can compare.