Reasons borrowers get turned down for loans.

We all hate being turned down for things, whether it be a new job, a housing application or indeed a new form of borrowing. People borrow money for a number of reasons, whether this be out of necessity, such as a short term loan, or to spread the cost of a discretionary purchase such as a new sofa or car. Having made the application, there is then that horrible wait for the lenders decision. When the answer comes back, according to the Daily Mail and Buddyloans, 1 in 5 applications will be a disappointing ‘No’.

In this article we are going to look at some of the main reasons that this happens to 20% of applications.

Having a poor credit history is likely to be the most common reason for this. Lenders will clearly want to be paid back, and on time without a lot of ‘chasing’ the borrower for payments. If lenders can see that you have shown a poor re-payer in the past, whether as a result of a reluctance or inability to pay, then they will be concerned that history may well repeat itself if they lend to you this time. In some cases this may be an unfair assumption as you may changed and your financial circumstances may be totally different, but your poor credit history certainly makes you a bigger risk for the lender and therefore them more likely to say ‘no’.

Another reason that people, especially those at the start of their adulthood, are declined for credit is for having no credit history at all. Why is this bad? Surely if you do not owe anything and have never borrowed in your life (or at least the last 6 years that the credit report covers), then you are a good risk? The answers is you may be…or you may not…. With no credit history the lender is taking a step into the unknown. You may be the best payer that they have ever had. On the other hand, you may not have any concept of the importance of repaying a loan, or no intention of doing so, and fall into debt immediately you have the loan in your hands. In these circumstances, it may be appropriate to take a very small credit card or similar borrowing, even if the interest rate is high, and just make a few purchases on it each month. Even if you spend just a few pounds, if you clear the balance in full each month you probably will not pay any interest and will start to build a history of repayments. Then when you need a bigger loan the lender will have a history to base the decision on.

Another negative that lenders place on a credit file is the number of applications and the frequency of these. This does not just apply to loans that are successful, even declined applications can affect how a lender perceives your creditworthiness. If you make a large number of applications in a short period it can look like desperation. To a lender, such desperation may indicate that you are only interested in getting the loan and have not thought in detail how you are going to repay it. Also a high ratio of applications to declines can make the lender question why so many others have said no, and this too can make them wary. 

A great thing these days is the ease, and cheapness, of seeing your credit file. This can now be done online and Call Credit (one of the 3 major credit reference agencies) offers detailed access to your credit file for life, for free, via their Noddle platform. This way, not only can you get a better appreciation of what the lenders see about you, but in some cases there can be errors on these reports and these could be holding you back.

It is not just your credit file that can be holding back your access to credit. As part of their checks lenders need to carry out ‘Know You Customer’ (KYC) or ‘Anti Money Laundering’ (AML) checks. One of the main ways they identify you is via the Electoral Role. Many people do not register on the Electoral Role, especially if they are not planning on living at the address for long, but this can have a negative impact on your access to loans.

Sometimes it is not even your fault that you have bad credit. In such cases you may have held a joint bank account, or taken out a loan with a partner or associate, which has gone bad. Even if, in your eyes, this was their account or their loan, legally you were responsible for all or part of it, so it appears as a negative on your report too.

While there are many other reasons you may get turned down for credit, a final one I am going to look at here is your job title or employment contract. Being employed on an inconsistent part time basis, or worse still having a zero hours contract can make lenders concerned. They need to assess, both for a regulatory requirement and to ensure they do not get a bad debt, that the loan is affordable over the life of the agreement. With a zero hours contract there is no guarantee month to month that you will have the income required to pay the loan. If one month you only have 5 days work, it is unlikely you will be able to pay your essential living expense, let alone a loan.

As I hope you will see from these examples sometimes when you are rejected for credit there are things you can do, other times there is not. The important thing however is to understand what may be causing the issue so that you can decide the best way to proceed.

Warning: Late repayment can cause you serious money problems - For help, go to moneyadviceservice.org.uk

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Author: Internal Compliance Department