Why was my personal loan application rejected?
If your personal loan application was rejected, you are not alone. A very high proportion of loan applications do get rejected.
Often the frustration of rejection is increased by the lender being deliberately vague about why your loan application was declined.
The reason the lender avoids telling you is to protect their lending criteria or rules from being public knowledge and from their competitors.
Whilst the nitty gritty of most lenders lending rules are secret, the broad rules are pretty much universal.
Lenders want to lend to people who have:
* The ability to pay back the loan.
* A good credit history.
* A stable employment history.
* A stable living arrangement.
If your personal loan application has been rejected, it is likely it failed in one of these areas.
Lenders make assumptions about your financial habits based upon on extensive research into previous applicants’ behaviour and habits. This allows them to make assumptions about you and your application.
By doing this, the lender has a better idea about whether the applicant is likely to be a good client and pay back the loan or a bad one who will cost them money.
Detailed Lending Criteria
Your income and ability to repay the loan
Each lender will work out, according to their formula, whether you will be able to repay the loan. They automatically take into account living expenses and will not allow the repayments to rise above a certain level of your income.
If the repayments (based on current interest rates) are over a certain percentage of your take home pay, you will be refused a loan automatically. Most lenders will factor in an increase of interest rates to provide a buffer as well. Use our personal loan calculator to estimate what the level of repayments would be for your situation.
If you currently have other loans and the repayments are a major portion of your income, then this could also be a problem.
Employment
Lenders are looking for stability in employment. Someone who changes jobs a lot or changes industries can give the impression of lacking reliability.
Most lenders will not lend to someone still in their probation period.
Credit Worthiness / Credit History
Almost everyone will have a Credit File and lenders will check it before approving your loan.
Your credit file contains personal information and details of your credit history.
These include details of:
* Previous loan applications made over the last 5 years.
* Current loans.
* Overdue accounts, also known as defaults.
* Current and previous employers.
Some lenders will refuse your application no matter how small an overdue account is. Overdue phone accounts, long forgotten because you moved, can stop you getting a loan.
Lenders record into your credit file if you make a loan application with them. If you make multiple applications, this can be seen as an indicator of financial stress. You should keep loan applications to a minimum and not apply to each and every lender you find.
Residential Situation
A number of lenders will enquire as to your residential situation going back 5 years or more. Moving around a lot is another potential indicator of unreliability or instability.
What to do if your loan application has been rejected.
Fix your credit file
It’s always a good idea to check your credit file prior to making a loan application. It is free and the small amount of time it takes can sometimes save your application. Entries should be checked for accuracy and defaults should be rectified.
Be patient
If you have changed employer and are still within the probation period it would be wise to consider waiting until you are no longer on probation as some lenders will not consider your application until you are considered a fulltime employee.
It could also give you more time to:
* Build up your savings.
* Create a savings track record to show the lender.
* Give you a larger deposit.
* Lower the amount you need to borrow.
Consider a secured personal loan
If you are applying for a personal loan to purchase a new car, consider getting a secured loan. The difference between an unsecured and secured loan is the lender takes control of the car until the loan is fully paid out. Another bonus for getting a secured loan is the interest rate will probably be lower.
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