What reasons cause a rejection of a loan, and what steps should you take?

Having a loan application declined is very common. Many borrowers assume that their chances of being rejected are quite low because direct lenders are more lenient about past credit payment records than banks. Unfortunately, lenders do not completely rely on your income sources to sign off on your application. Affordability checks include your credit score assessment as well.  

There are various factors that lenders take into account to decide whether or not to approve your loan. While having a good credit score and income sources can improve your chances of being accepted, it does not guarantee that you will be approved.  

What exactly causes a rejection? 

There are several reasons why your loan application could be rejected: 

A poor credit history 

Direct lenders accept applications from subprime borrowers. Most of the loans such as bad credit loans and small emergency loans are easily approved as the loan amount is small and the lending decision is basically made based on your income sources.  

If you are looking to take out unsecured loans in Ireland, your credit rating should be stellar. Otherwise, lenders will restrict the loan amount. Some lenders accept applications for these loans from bad credit borrowers, but it does not insinuate that all credit score ranges are accepted.  

If your credit score is extremely poor, lenders will not feel inclined to lend you money. The risk of default is too high. Unfortunately, they cannot turn to your personal assets to cover their money back in case you default.  

Your credit history should be decent. Make sure that it is not lower than the bare minimum score that lenders accept as their approval criteria.  

A limited or no credit history 

A limited or no credit history can also reject your application. Short-term loans get easily approved despite having no credit history at all, but unsecured loans and small instalment loans cannot be approved unless you have a credit history. 

Bear in mind that your credit history speaks volumes about your past payment behaviour. Lenders would want to know how responsibly you handled your debt. A lack of credit history does not give clarity on your payment obligations. It is likely that you will fail to discharge the loan this time despite having a good income source. Some people, after all, have a propensity to misuse loans.  

Too many credit inquiries 

Another common factor that causes your application to be turned down is too many credit applications. When you apply for an unsecured loan, for instance, avoid putting in too many credit applications in a short space of time.  

Since you cannot determine beforehand which lender will accept your application, you apply to a couple of lenders simultaneously. Unfortunately, this will never work to your advantage. This will result in hard inquiries that pull your credit points. Lenders will likely assume that you are a desperate borrower, which will never work to your advantage. 

In order to avoid this situation, you should obtain prequalification offers. They are made after running soft credit checks, which do not get recorded on your credit report, and hence your credit score will remain unchanged.  

Insufficient income 

Just because your credit score is decent, it does not increase your chances of being accepted. Your credit score reflects your past payment behaviour, not your current repayment capacity.  

Lenders will have to check your income sources to understand whether your budget has the wiggle room to discharge the debt along with other expenses. If lenders are sceptical about your repayment capacity, they will most likely refuse you a loan.  

Steps you should take if you have been refused a loan 

Now that you know there could be several reasons for rejection of your loan. Here are some steps you should take if you have been declined a loan: 

Ask your lender 

No lender is obligated to inform you the reason why they turned you down, but asking them for a reason should not hurt anybody. It completely depends on a lender whether they will acknowledge your request or not. They may or may not respond to your email.  

Check your credit report 

The most common reason for being refused a loan is your poor credit history. You should check your credit file to see what your actual score is. Chances are you are the victim of identity theft. There might be some unfamiliar accounts that you never opened. Checking your credit score will clear the way for knowing the possible reason for being turned down.  

Make sure you are not associated with someone with bad credit 

If you are linked with someone whose credit history is not up to scratch, you will highly likely be refused unsecured loans, mortgages and other large loans. Even if you have settled your joint accounts, it is vital that you get your ex-partner or spouse’s name from your credit report.  

You will need to send a notice of disassociation to the Central Credit Register (CCR). Note that you will have to provide evidence to prove that you and your partner are no longer financially associated in any way.  

Check your eligibility 

Before applying for another loan, make sure you meet the lender’s eligibility criteria. It is likely that your application was rejected previously because you did not meet the lender’s requirements.  

Use a loan eligibility checker to see whether you will likely be accepted for a loan. Carefully check the approval criteria of different lenders. Choose the one whose criteria you meet. Contact a broker for a smoother process.  

The bottom line 

There are several reasons why your loan application could be declined. A poor credit score is among those reasons. You should carefully assess why you are refused a loan. Make sure that you do not repeat those mistakes because this will further damage your credit rating. If you owe too much debt and you are struggling with it, consult a debt expert. A high debt-to-income ratio is also a big cause for the rejection.