Refused a loan: What should I do next?
When funds are running low and times are tight, being refused a loan can be a stressful and demoralising experience.
If you've been turned down for a loan, it could be for a number of possible reasons.
But the first thing to remember when you're refused finance or a loan is not to panic.
In this blog, the Dot Dot team are taking a look at the most common reasons why you may have been refused a loan, what you could do to improve your chances of a successful application next time, and where to turn if it appears that another loan may not be your best option.
Reasons why you might be refused a loan
If you’re not sure why you were refused a loan, the chances are it will be because of one of these reasons...
You don't have enough income
Responsible lenders must ensure that you can pay back the amount you want to borrow. During your loan application they will automatically evaluate your current income and outgoings to work out if you can afford the loan repayments.
If you want to borrow a large amount and your income is low (or your expenditure is high), there's a greater chance of being refused by a loan company.
To avoid this happening in the first place, you should always apply for a loan amount that's within your means. It's also a good idea to draw up a budget before applying to work out how much you'll be able to comfortably afford in terms of monthly loan repayments.
You have a poor credit score
Your current credit rating is a key part of getting a loan approved. A huge number of people in the UK aren’t aware of their credit score, and a low credit rating is usually a red flag to any potential lenders.
Sites from credit reference agencies such as Equifax, ClearScore and Experian allow you to check your credit rating for free and usually show you what your score means in the real world.
You have no credit history
Having no credit history can actually be as damaging as having a poor credit history. If you haven’t applied for loans or credit before, you’re likely to have a very limited or empty credit report.
This could flag you as a high-risk borrower, as there is little evidence that you've borrowed money responsibly in the past. This lack of credit history often affects young people, who have little experience with credit and limited opportunities to pay regular bills.
You're struggling to pay existing debt
If you’re already repaying personal loans, secured loans or payday loans and your credit cards are at their limit, this could ring alarm bells in the credit check process of a potential lender.
You’ve made too many applications
Making recurring ‘hard search’ applications, even to different loan providers, can be harmful to your chances.
When you submit a ‘hard search’ loan application to a responsible lender, this will register a 'search marker' on your personal credit file, whether your loan is approved or not.
So if you’ve been declined by one lender, quickly applying to others can make the situation worse as more markers will be added to your file.
Credit reference agencies have made a mistake on your credit file
Lenders should be able to let you know whether they turned you down based on your credit score. If this happens, you can contact credit reference agencies directly and ask them for a copy of your file.
If you spot a mistake - perhaps your personal details are incorrect, there are errors in the status of your accounts or someone else's accounts have been confused with yours - you can ask them to correct it, if you can provide evidence.
What to do next if you have been refused a loan
If your loan application has been rejected, the best thing to do is to take stock of your situation and pause for a while before deciding your next move.
While less regulated alternative borrowing options may seem tempting to some, it’s always sensible to consider safer routes that won’t increase your debt and add to your worries.
Consider different ways of accessing money
If you've been refused a loan, it's important that you don't immediately apply for more credit.
As mentioned above, multiple applications appearing quickly on your credit report will only damage your future chances of a good credit score.
If access to short-term cash is vital, you could instead consider other avenues to create cashflow, such as selling any unwanted possessions, starting a side hustle (a way of making money outside of your regular job), borrowing money from a trusted friend or relative, or asking local credit unions for their support.
Improve your credit score
Making efforts to improve your credit score before applying for another loan will improve your chances, as the most common reason leading to an application being rejected is credit history.
Ways you can improve your credit score include:
- Getting on the electoral roll. This helps credit reference agencies and lenders to easily confirm your name and address, so your score will increase as a result. Go to the gov.uk site to register to vote.
- Putting utility bills in your name, if you live in shared accommodation.
- Using a credit building card little and often, spending only small amounts then paying off more than your minimum payment every month.
- Paying all your bills on time by setting up Direct Debits.
If you want to test the water and see if your efforts are making difference to your credit score, check your rating for free with some of the agencies mentioned above, plus you could also have a look for brokers or lenders who offer ‘soft search’ functionality. This doesn't harm your credit status and the search won't be seen by other lenders or credit agencies.
Pay off your current debts
As the size of your current debt is one of the most common factors in being refused a loan, it probably goes without saying that you should try to pay some of it off before starting a new application.
Of course we know that this is easier said than done, but if it's possible it can show lenders that you're a reliable borrower who can be trusted to make your repayments, and it may improve your credit score.
Consider alternative types of loans
If the steps we've laid out above haven't proved successful and you've discovered that you still have a bad credit score, you could consider searching for loans that are tailored to your circumstances.
All lenders have different criteria in terms of who they can approve for a loan, so focus on those that are able to accept someone with a lower credit score.
This usually means that you will be offered a higher rate of interest on your loan, so it's incredibly important to do your research before applying.
Some lenders provide an online eligibility calculator, which allows you to find out whether you're likely to be accepted for an unsecured loan prior to applying.
Who can I turn to if I've been refused a loan?
Being refused a loan and mounting debts can cause stress, anxiety and mental health problems. But don’t worry, there are several free resources and organisations in the UK that can help you manage your debt.
offer free online debt advice and can advise you on managing your debts and managing your finances to avoid further debt.
Did we miss anything? Let us know by sharing your tips!