What Happens if my Loan Application is Declined?

If you are looking to borrow money and apply for a loan and find that it has been declined, this can certainly be frustrating, but there may be a very logical reason for this. Whilst we always think we deserve to be approved, there are several reasons why a lender may decline your application, based on income or credit criteria or even just because they have no more money to lend out that money!

When being declined for a bank or personal loan, you will not be charged anything and there are often no repercussions, but you may just find that there is a small search on your credit file which disappears after a few months. Today we explain everything you need to know if your loan application has been declined.

Why was my loan declined?

One of the most important things to do when your loan application has been denied is work out exactly why it was denied. Once you understand why your application was denied you will be able to make adjustments in the future.

There are two main reasons that could be the cause of your declined application; income and credit score.

Income – If your lender denies your loan application based on your income, there are two likely issues. Firstly, It could be that your income doesn’t meet the lenders minimum requirement. Lenders are only allowed to give out loans to applicants who meet the minimum requirement for income. This is quite a difficult one to get around and because lenders don’t publish these minimums it’s difficult to know if your income will be enough to be approved.  The second reason is that you have a high debt-to-income ratio. You can calculate this your debt-to-income ratio by dividing monthly debt payments by monthly gross income. If you think your debt to income ratio could be the issue, work on paying down some of your debts, to stand a better chance next time. 

Credit – Lenders can also deny loans based on the potential borrower’s credit score. Your credit history and credit score are important factors that lenders assess when considering a loan application. Your credit score is a number between 300–850 that shows a consumer’s creditworthiness. A higher credit score signals to lenders that you are a reliable and safe choice to lend to. A low credit score or a credit history riddled with red flags will indicate to a lender that you are a high-risk borrower. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors.

One has to consider that each lender you apply with may have a different criteria, based on their risk appetite and maybe even the amount they are able to lend that month. Some lenders have stricter regulations based on their location or state, whether they are based in the UK or in the US, with states like Nevada or Texas having different rules to those where lending practices are far more stringent. 

Does being denied affect my credit score?

No, being denied a loan will not negatively affect your credit score. However, when a lender asks a credit bureau to see a consumer’s credit report, an inquiry is posted to the consumer’s credit report. Credit inquiries can be hard or soft, but almost always if you apply for credit, the lender will run a hard credit inquiry. A hard inquiry usually knocks less than five points off your credit score, but that shouldn’t last long—24 months at the most. However, being denied a loan does not negatively affect your credit score.

How can I improve my credit score?

If you need to improve your credit score there are many ways to improve:

Manage your household bills well – Keeping up to date on your utility accounts and household bills, like your water, electricity and gas, can help you to build a positive credit history.  This is another way that lenders can see that you are responsible with your money. Even just paying your rent on time can improve your score.

Get on the electoral roll – The quickest and easiest way to improve your credit score costs nothing, you just need to register on the electoral roll, even if you live at home or in shared accommodation. This is  crucial to building your credit history as lenders can use it to confirm your address.

Get a credit card – Getting a credit card can feel scary for those who aren’t confident about their finances, but it can be a great choice for your credit score. Make sure that you always pay it off on time and in full each month. Don’t let your spending get away from you. This will help you to build a positive credit score and show lenders you can reliably pay off debt. 

Open a bank account – Having a bank account that you manage well shows lenders that you are stable and financially reliable. If your account has an overdraft make sure you don’t stay in it. Ideally you should use no more than 25% and pay it off as quickly as you can.

To check your credit report for just £2, you can access a statutory report from the UK government.