The value of new UK consumer lending reached almost £30 billion as of May 2022, according to data published by Statista. So, it’s understandable if you feel a little concerned after having your loan application denied.
However, loan rejections are more common than you might think, and the good news is that there is often plenty you can do to improve your eligibility.
So, what can you do after a loan rejection?
Find out why your application was rejected
First things first, find out why your application was rejected. Lenders will generally give you an indication as to why an application has been rejected at the time they make the decision but, if they don’t, or their explanation is unclear, ask them for more information.
The reason your application has been declined will often fall into one of the categories below.
- Bad credit: Lenders look at your borrowing history. They want to see a solid record of you making repayments. If you have previously missed repayments, or have made them late, they may consider you to have “bad credit”. While taking out a loan can help with bad credit, provided you can afford the repayments, it could be prudent to improve your credit history first.
- Income and expenditure: Loan providers analyse your income and expenditure when deciding if you can afford to make your minimum monthly payments. If they’re not confident of this, they could decline your application.
- Debt-to-income ratio: Lenders also compare how much you owe every month with how much you earn. If this already looks too high, they are unlikely to increase this by giving you a new loan.
There can be several other reasons why your application might have been denied. The important thing is to identify the reason this has happened, as this will help you to decide what to do next.
Improve your standing
Once you’ve been declined for credit, you should try to take steps that increase your chances of future approval, starting with the specific area that caused the rejection. Beyond this, you can practise the following good credit habits to boost your chances.
- Make monthly payments on time – This will help you improve your credit history.
- Keep your credit utilisation low – In 2021, the average person spent roughly £50 on a credit card per purchase. While this may not seem a lot, your outstanding balance can quickly increase if you’re not careful. Lenders look at the proportion of your credit limit that has been used and therefore the credit reference agencies generally recommend that this doesn’t exceed between 20 and 30%. It’s also worth bearing in mind, however, that leaving credit limits completely unused can actually reduce your credit score, as this isn’t demonstrating a responsible borrowing history.
- Be patient – As tempting as it can be after being declined, don’t make more applications in quick succession.
- Review your reports – Ensure they’re accurate in preparation for the next time you apply for a loan and contact the credit reference agencies if you spot anything you think has been reported incorrectly.
Having your application rejected is disheartening but, with the right approach, you can improve your chances of being accepted in future. Which of our tips are you currently implementing?