Finding out your loan application has been rejected can be frustrating and demoralising. You may have spent a long time trying to get your finances in shape or dedicated your time to filling out a lengthy application – only to be told your loan has been declined by the lender. However, it is important you do not let your frustration make the situation worse. Rushing into a new application is a bad idea, as is turning to a payday loan or other types of lender that offer expensive short-term loans. In this article, we will lay out the steps you need to take and explain how you can get back on track after you have been refused a loan.
Why you might be refused a loan
There are a whole host of reasons why a loan application might be declined. Here are some of the most common causes:
- Your credit report includes late payments or county court judgements (CCJs)
- You have a limited credit history
- You are not on the electoral roll at your current address
- You do not earn enough money to afford the monthly repayments
- Your income is not regular or secure enough
- You have too much debt
- You have too much available credit already
- Your credit report includes fraudulent activity
- You do not meet the lender’s basic criteria, such as being a UK resident or over the age of 18
- You are financially linked (for example by having a joint mortgage) to someone with bad credit
Lenders do not have to tell you why you have been refused credit (though you can still ask anyway), but they do need to tell you which credit reference agency (CRA) was used to assess your creditworthiness. You could then check with that CRA to find out what the issues are with your credit history. You can read our article ‘The best way to check your credit score for free’ to find out how.
What to do if you are refused a loan
If you are unexpectedly refused a loan, it is completely rational to feel confused or concerned. However, there are plenty of steps you can take to get your finances back on track. Before you start with the tips that we have outlined below, make sure that you avoid applying for another loan straight away. If you keep getting declined, it may be because you keep applying without making any changes. Your application will have been rejected for a reason, likely one of the options we have listed above. Until you know what went wrong and how to fix it, a new application will only make your situation worse.
A loan application will involve a hard credit check that will leave a mark on your credit file. Too many hard checks in a short period of time will suggest to lenders that you are struggling to control your finances and are desperate for money. This will make you seem like a much less attractive borrower and can have a significant effect on your ability to access credit in the future.
Instead of filling out another application, you need to figure out why the original application was declined. Here are some steps to follow:
1. Speak to your lender
Your lender does not have to tell you why you were refused a loan, but it may choose to. If it was a simple error on your application form or a mistake somewhere else in the process, you may be able to make a simple correction and apply again.
If your lender does not want to share why you were refused a loan, it must at least tell you which credit reference agency (CRA) it used.
2. Check your credit report
Once you know which of the three major UK CRAs – Experian, Equifax or TransUnion – was used in the application process, you can look up your relevant credit report. Make sure all the information listed is up to date, including your address and other personal details. Any mistakes you point out to the CRA will have to be investigated and rectified within 28 days.
3. Improve your credit score
If there are no obvious errors, you may find the reason your loan application was declined was due to your credit score. A low score suggests that you may not be a reliable borrower, but there are ways to give it a significant boost. Adding yourself to the electoral roll and paying off any other outstanding debts can be useful quick fixes. We have more ideas on how to turn your credit score around in our article ‘How to improve your credit score quickly’.
You may find that you need to take a more long-term approach to improving your credit score, especially if you have a history of missed payments. Rebuilding your credit history will take time and patience, but eventually, it will improve as years of missed payments are replaced by years of responsible borrowing. The standard length of time for most entries on your credit file is six years. After that, the information will no longer be visible to lenders and your credit score will begin to improve. Read our article ‘How can I remove bad debt from my credit file?’ for more information.
What to do if you need a loan but have been refused everywhere
If you have already been rejected for multiple loans, it may be time to go back to basics to get a grip on your finances.
Your first step – even before you start to think about how to get more money – should be to understand where the money you do have is going. Create a budget to break down your outgoings and try to pick out any areas of overspending.
If you are looking for a loan to cover everyday bills like energy or water, get in touch with your providers to see what programmes are in place for users struggling with payments. You may find you can spread costs over a longer period or move on to a different tariff. For example, low-income broadband customers may be able to access a cheaper plan through social broadband. We cover this in detail in our article ‘Which providers offer the best social tariff broadband?’.
Struggling homeowners could also speak to their mortgage provider to discuss a payment holiday, though keep in mind that this would lead to you paying more interest on your mortgage overall. Read our article 'How do I take a mortgage payment holiday and will it affect my credit rating?' for more information.
Alternative types of borrowing
There are other ways to borrow money that doesn't require taking out a loan. Keep in mind that applying for any kind of credit straight after you have been refused a loan is probably a bad idea. If you have followed the steps listed earlier in this article and find that your financial situation has changed, here are some borrowing options you could explore.
A credit card may be a better option than a loan if you are looking for money to fund a specific purchase, cover everyday costs or tide you over to the next payday. You will not pay any interest on what you borrow if you clear your card debt within the billing period. If you do not, the debt can quickly become very expensive as the interest compounds. Some cards offer generous 0% interest periods, though these are usually only available if you have a good credit score.
If you have a low credit score, you could get a credit card designed to help you rebuild your borrowing history. We have more information on our ‘Compare the best credit cards to build credit and improve bad credit’ page.
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Spending more money on your debit card than you have in your current account will usually result in you going into your overdraft. This is effectively an emergency credit facility provided by your bank. Overdrafts can be very expensive and charge high interest rates, especially if they are not agreed with your bank in advance. If you have an approved overdraft, it could be a cost-effective way to fund an unexpected expense. Make sure you check with your current account provider before you dip into your overdraft to find out how much it will cost.
A different type of loan
There are two main types of loan – secured and unsecured. Secured loans require an expensive asset, such as your home, to be used as collateral, which can be sold to cover the debt if you do not repay the money. Unsecured loans do not require collateral and are instead structured around your borrowing history and ability to repay.
Being refused one type of loan does not necessarily mean you will be refused another. Check out our article ‘Secured vs unsecured loans: Which is best for me?’ to make sure you are going for the option that suits you the most.
A credit union is a non-profit financial organisation that lends money to its members. The membership usually consists of people who live in the same area, work in the same field or otherwise have something else connecting them.
The borrowed money comes from a pool of savings built up by the membership and is often lent with an interest rate much lower than what is offered by standard providers.
This will not be an option for a lot of borrowers as many credit unions will require you to have been a member and saved with the organisation for a period of time before you can borrow any money. Find out more in our article ‘Credit unions – what are they and what can they do for you?’.
Universal Credit advance and government budgeting loan
Recipients of Universal Credit can apply for an advance on their payments to cover emergency costs. You may also be able to access a government budgeting loan.
The Universal Credit advance is interest-free and can be spent on essentials such as food, clothes and rent. The money is repaid through deductions from any future universal credit payments, usually spread over the next two years. You can apply by speaking to your Jobcentre Plus work coach, applying through your online account or calling the Universal Credit helpline. Read more on the government’s ‘Universal Credit advances’ page.
Budgeting loans are also interest free. To qualify, you will need to have claimed eligible benefits for six months. These include income support, income-based jobseeker’s allowance, income-related employment and support allowance, and pension credit. Repayments are deducted from any future benefit payments paid over the next two years. Find out more information on the government’s ‘Budgeting Loans’ page.
Things to avoid if you have been refused a loan
We have covered what to do if you are refused a loan and where to get free debt help, but there are also areas you should definitely avoid.
For example, payday loans or other high-interest short-term loans are likely to only make your financial situation worse. Astronomical interest rates can turn borrowing a small amount of cash into problem debt that could last for years. It is true that you are more likely to be accepted for a payday loan than a loan from a mainstream lender, but the cost in the long run means it is best avoided.
It can also be a good idea to avoid other short-term borrowing such as doorstep loans (also known as home credit) and buy-now-pay-later schemes without getting free debt advice.
Where to get debt help
Anyone struggling to get a loan due to existing debt should first seek out some free debt advice. It can be easy to slip into problem debt that then spirals into an increasingly serious issue. With expert guidance, you can get on the path to being back in control of your finances as soon as possible.
Debt experts can help you assess your financial situation, negotiate with lenders and structure a realistic repayment plan. Below are some of the best organisations to turn to for help.
You could also check out our article ‘Where to get free debt advice’.
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