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What to do next if you are refused a loan

Finding out you have been rejected for a loan can be hard to take, especially if you have important plans for the cash. Here we explain why you might have been rejected and what you can do next.
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Why loans are refused

There are plenty of reasons why your loan might have been rejected. This could be anything from a history of missed payments to an innocent misspelling of your name. You could also be rejected due to not having any credit history at all, or having bad credit.

Some of the most common reasons include:

  • Your credit score is too low

  • You have negative elements in your credit report such as late payments, county court judgements, or if you’re not on the electoral roll at your current address

  • You failed affordability checks – ie the lender doesn’t think you can afford the repayments

  • There's fraudulent activity recorded on your credit report

  • There are questions about your identity or your address – for instance if you’ve moved and haven’t updated all your financial products

  • You don’t meet specific policy conditions – for instance, some providers will set minimum income levels before they will lend to you

Unfortunately, lenders don’t have to tell you why they rejected your loan application, although you can ask.

They do have to tell you which credit reference agency (CRA) they used, so it’s worth checking out your credit report with that agency and looking for any errors or areas where you can improve your score. 

What to do (and not do) next

You might be unsure of where to look next and worried about how to access the credit you need, but just applying for different loans is likely to make things worse. A cycle of applications and rejections will have a negative impact on your credit rating and is likely to make it much more difficult for you to borrow in the future.

The first step you should take is to ask the lender which credit reference agency they used to run a credit check on you, in case there is an error on your report. The UK’s three major CRAs are Equifax, Experian and TransUnion. Next, you should get your credit report from the CRA and make sure the information they have on you is correct and up to date. If there is a mistake, you can report it and they have 28 days to investigate and rectify it.

While most CRAs charge you to get your credit file, there are usually free services you can use. For your Experian report you can use Money Saving Expert’s Credit Club and for TransUnion you can get free access with CreditKarma. Clearscore gives you a free report based on your Equifax scores, but there are differences so be cautious.

Alternatively, all the CRA’s will offer a free trial where you can see your score for free for 30 days. Make sure you cancel the subscription before the trial period is up or you’ll be charged.

As well as checking for errors in your report, you should also look at ways to improve your score to make you more attractive to lenders. Add your name to the electoral roll and pay any outstanding bills if you haven’t already, as this will boost your credit rating.

Once you have rectified any errors in your credit history and improved your credit score, you can start to look at what other lending options are available to you.

Other types of borrowing

If your credit score or financial situation has improved, you might want to consider applying for a new loan. But you should consider all the options available to you, to find the most affordable way to get the money you need. Here’s some of the core options:

Credit cards

You may be able to get a credit card for bad credit, even if you have been rejected for a loan. You could use this to spread the cost of large purchases, for short-term borrowing or to help rebuild your credit score. 

If you’re using the card to spread the cost of a large purchase, make sure you pick a 0% purchase card if you qualify or the lowest rate you can get. Make sure you have a plan to pay the card off as soon as is realistic, before your 0% offer comes to an end. You need to make at least the minimum payment each month or you could lose your introductory offer or end up with a higher APR. The longer you are in debt the more expensive cards become. 

If you are using the card to boost your credit rating, make sure you only spend what you can afford and that you pay off the balance in full at the end of each month.

In both cases, setting up an automated system will make it easier – either a standing order for a set amount, or a direct debit to clear the balance in full.

Overdrafts

If you have a current account, you may be able to arrange an overdraft with your bank. Be aware that even though banks cannot charge daily fees anymore, interest rates may be high – with most charging about 40%.

Check with your bank first before you go into your overdraft, and try to clear it as soon as possible to keep interest charges to a minimum.

Credit unions

Credit unions are non-profit financial organisations. Their memberships usually consist of a group of people who live in the same area, work in the same industry or have something else in common. 

The members of the credit union pool their savings to loan out to other members, usually at lower than market interest rates. This makes them a healthy alternative to other short-term lenders.

To access a loan, it is likely you will need to join the credit union. You may also need to save with them for a period of time (six months for example) before you can borrow any money.

To find a credit union in your area, search the Association of British Credit Unions website.

Loans to avoid

Payday loans can be an extremely dangerous way to borrow money Their interest rates are so high that people who can’t meet repayments can very easily be pushed into a ruinous spiral of debt. Some of these companies continue to target people who are unemployed, claiming benefits or otherwise struggling financially. It is usually the most expensive type of borrowing you can get.

Home credit or ‘doorstep’ loans are also extremely expensive. They are repaid in instalments handed to a representative of the lender who comes to your address each week. A debt collector knocking on your door every week is likely to be a stressful experience, so it's best to avoid these loans.

Store credit/finance is frequently offered to people at the point of sale, but can mean you end up spending far more for something than the advertised price once interest is factored in. It allows you to purchase items with credit and pay them off in instalments, but if you are not able to make these repayments the items could be repossessed in some schemes, while your credit score could be hit and you will have to pay fees in others.

Improving your financial situation

If you have been rejected for a loan because you’re in financial difficulties, there are a few things you should do before applying for more credit.

Create a budget to make sure that you’re not overspending. Breakdown your weekly or monthly outgoings to see where you can cut back including expensive subscriptions, costly luxuries or any waste.

Get in touch with your energy, broadband, water and other utility providers to see what schemes they have in place for customers who are in arrears or struggling to pay their bills. You may be able to spread your payments over a longer period of time, reduce your monthly bills or move to a more suitable tariff.

Talk to your mortgage provider to see if you can take a payment holiday, or even remortgage. Be warned that a holiday will increase the interest you pay overall, and means that it will take longer to pay off your mortgage – so it should be considered as a last resort. You might be eligible for the government’s support for mortgage interest programme (SMI), so that’s worth considering too.

Look for free money advice from the following organisations. They can help you get a handle on your financial situation and show you what help is available.

You should also check to see what benefits you are eligible for. Even if you are employed, you may be able to get financial support. If you are struggling to buy essentials, you could be eligible for a government budgeting loan or universal credit advance payment.

The universal credit advance is an interest-free advance of universal credit payments. It can be used to meet the cost of food, clothes, rent and other household essentials. You repay the advance out of any future universal credit payments you receive, usually over the course of two years. You can find out more about how to apply here

Budgeting loans work in a similar way and are also interest free. You will need to have been claiming benefits, such as income support, income-based jobseeker’s allowance, income-related employment and support allowance, or pension credit, for six months to be eligible. Like the universal credit advance, repayments will be deducted from your future benefit payments over the next two years.

Help with debts

If you have problem debts, spiralling debts, or you’re struggling to repay what you owe – speak to a free debt charity as soon as possible. They can help you negotiate with lenders and come up with payments plans. The following organisations are all good places to start: