Denied a Loan

Have you had a loan application refused?

Having a loan application refused can be a stressful experience. It can often be confusing as well because loan providers sometimes do not explain the reasons why an application has been denied -intentionally and unintentionally.

The small print that accompanies your loan application will contain important information about what you are applying for along with eligibility requirements although this can sometimes be lost in difficult to read legal jargon, but always take the time to read the small print as this can help you understand the requirements needed to get your loan.

Somewhat understandably, some lenders are less than forthcoming about the reasons why an applicant has been declined a loan. Although extremely frustrating, the main reason for this is that lenders rely on a confidential points scoring system which dictates who is accepted for a loan and who isn’t. If you don’t score enough points or fulfil the eligibility requirements, you won’t get a loan accepted. By keeping the points scoring formula secret, the lender is protecting itself from people that would seek to game the system and have loans accepted that should actually be declined.

Reasons for a loan being declined

Although, the lenders point scoring system to determine the eligibility of a loan applicant is confidential, helpfully there are a number of general reasons why a loan might be declined. So if your loan application has been declined recently, take a look at these possible reasons.

Lack of credit history

This reason is probably the most frustrating reason as to why you might have been denied access to a loan. It applies to a person that has little to no credit history, in other words, a person that has no credit cards, no mortgage and has never had loans or any type of finance before.

If you have never had finance before, a prospective loan lender when check your credit history and see no records whatsoever so they would have no evidence of how you would manage the debt over time. Lenders want to lend to people with a history of repaying their debts within the agreed parameters, if there is no evidence for them to see (even if you have never applied for finance before) this would likely result in the application being considered as high risk and there is a possibility that the loan could be denied.

There is a certain logic to this from the side of the lender, but from the perspective of the loan applicant this can seem harsh and unfair. It is as if the applicant is being penalised for managing their financial affairs without ever having had the need to seek credit.

Too many credit cards and loans

As much as your loan application could be declined for having a lack of credit history, it could also be declined for having too much credit history in the form of a number of credit cards and loans that the lender would consider to be too many.

Each lender will have a slightly different criteria when it comes to scoring an application, but loans have certainly been declined in the past due to an applicant having too much credit available to them at the time of application.

For example, if a lender sees that a loan applicant has six credit cards that would mean that there would likely be a substantially amount of credit still left available to the person to draw upon at any time. If they did happen to use the credit cards to a greater degree, it might make the repayment of a loan more difficult so the lender might decide that the applicant is a high risk and decide to deny the loan.

Bad credit history

If you have struggled to manage your finance in the past then this will show in your credit report. A credit report is a personal history of all the credit that you have taken out over your life which can detail things from loans, mortgages, credit cards, and higher purchase agreements through to mobile phone contracts. If you have failed to pay credit agreements as per the agreed schedules then that will show on your credit history report.

Items such as County Court Judgements (CCJs) and defaults on credit can stay on a person’s credit report for up to six years so if there is evidence of poorly managed credit then this will affect the viability of a loan application and might result in a loan being declined.

Ways to improve loan eligibility

If you believe that your loan application might have been declined due to one or more of the reasons noted above, then there are some practical steps that you can take in order to try to rectify your current score and eligibility for a loan.

• Order a credit report. By obtaining your credit report you are able to view the current state of your finances (in the eyes of lenders) and you will have the opportunity to put right any inaccuracies that might be in the credit report. The more you know about your credit report, the more chance you are giving yourself of having a loan application accepted. You can obtain a copy of your credit report HERE

• There are a number of small ways that you can go about improving your credit score which shows on your credit report. Simply things like your details showing accurately on the Electoral Register can be very important. For more detailed instructions on improving a credit score see our page on credit reports.

• If you have little to no credit history, you might want to build up your credit score by applying for less competitive deals than the current market leading loans that can have more stringent eligibility requirements. By starting slowly and carefully, you will likely stand the chance of increasing your credit score after which time you may be in a better position to make a successful application to a competitive loan offer.

• Another way to increase a credit score in the event of a lack of credit history, or to help go towards repairing a bad credit history is to take on a credit building credit card. The credit limit on these types of cards are usually lower than a normal credit card and the APR can be higher, but the aim is to repair a credit rating so fees should not be an issue if a very small amount is spent on the credit card each month and is repaid in month before the end of the month when the balance is due. By doing this over a period of time, it should help to increase or repair a credit score and provided that the balance is paid in full before it is due each month it should not incur any fees.

• If you believe a loan company has declined a loan due to you having access to too many credit cards or credit then there is the option of choosing to cancel unused credit cards. Some people may simply cut up cards that aren’t being used. Although this will prevent you from physically handing it over to someone to pay for an item, the card still exists on the banks systems, it still shows in a credit report and it would still be at risk of being cloned or defrauded via some possible form of criminal enterprise. Therefore, if the card is not in use, you may wish to formally cancel it at the bank or credit card provider.