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So You’ve Been Declined for a Loan: What Next?

Moneymagpie Team 22nd Feb 2024 No Comments

Reading Time: 3 minutes

Applying for a loan can be a nerve-wracking thing to do, for a variety of reasons. The responsibility of paying back such a large sum of money can weigh heavily, as can the prospect of not being granted it in the first place. For the near-ten million of us already in debt, though, it can be harder to get accepted for something as simple as an overdraft or credit card. In the event that you are rejected for a financial product you need, what are the next steps?

Why are Loans Declined?
Assessing Your Own Situation
Alternative Finance Solutions
Improving Your Credit

Why are Loans Declined?

Banks typically refuse loan applications for one simple reason: a credit reference agency has given you a low credit score. There are three independent credit reference agencies: Equifax, Experian and TransUnion. These agencies evaluate the financial risk that individuals pose to institutions; the lower the resulting ‘score’, the higher a risk you pose to banks and lenders and the less likely you are to be accepted for a loan, mortgage or overdraft.

Credit scores are built up on a great deal of information, including simple information such as your age, income and home ownership status. Low scores tend to be given where individuals have a poor history of keeping up with credit obligations. The late payment of prior loans, missed payment of utility bills and existence of outstanding debts all indicate that you pose a risk to lenders – leading to loan refusals.

Assessing Your Own Situation

Having acknowledged that loan refusals are almost always linked to personal financial factors, your first positive step after experiencing a loan refusal might be to properly examine your own situation. There are several ways to do this, and more reasons to than simply ‘getting answers’; the more you know about the state of finances, the better-placed you are to address them and improve your chances of accessing financial products in the future.

First and foremost, you should consider getting a credit report from one of the aforementioned three credit reference agencies. This will show you what banks and lenders are seeing when you apply for a financial product. Credit reports don’t exist in a vacuum – apart from in edge cases like students or recent graduates, where are complete lack of credit history makes them an unknown (hence high) risk to lenders.

Next, you should create a spreadsheet to track your personal finances more directly. Plotting your income against your expenses, and backdating your spreadsheet a number of months, can show you how much you might be overspending and also where.

Alternative Finance Solutions

Those with a poor credit history are not automatically locked out of accessing loans. Indeed, there are a variety of products on the market geared specifically towards people with bad credit, with bad credit debt consolidation loans being especially useful for combining multiple debt sources and satisfying initial lenders. The caveat is that bad credit financing solutions often carry higher rates of interest, or shorter repayment terms.

Improving Your Credit

For the long term, though, your best course of action is to improve your credit score. As hinted above, bad credit financing can be a helpful short-term measure, but long-term habit-building is the only way to ensure you don’t fall back into a cycle of late or non-repayment. This means setting yourself a budget, increasing the amount you save back each month and, crucially, paying your bills on time.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.