Being declined for a small loan can feel like a significant setback, especially when you’re facing financial difficulties. It’s a situation that many people in the UK find themselves in, and it can be a source of stress and worry. However, it’s important to remember that this is not the end of the road. There are several steps you can take to understand why you were declined and improve your chances of getting approved in the future.
In this comprehensive guide, we’ll explore these steps in detail, providing you with an in-depth roadmap to navigate this challenging situation. We’ll discuss everything from understanding why you were declined, checking your credit report, improving your credit score, considering alternative lending options like credit unions and peer-to-peer lending, seeking professional financial advice, and even exploring the possibility of debt consolidation if you have multiple debts.
Understanding Why You Were Declined
The first step after being declined for a small loan is understanding why it happened. Lenders in the UK consider several factors when deciding whether to approve a loan application. These include:
- Credit score - Your credit score is a numerical representation of your creditworthiness. Most lenders have a minimum score threshold they require applicants to meet.
- Income - Lenders want to see consistent income that shows you have the means to repay the loan. Insufficient income can lead to a declined application.
- Employment status - Having a stable, steady job demonstrates you have reliable income to repay the debt. Being unemployed, on benefits, or having an unstable job situation can result in declined applications.
- Existing debts - Too many current debts can indicate you may struggle to take on more credit. High debt-to-income ratios often lead lenders to decline applications.
- History of missed repayments - Previous missed or late repayments on credit cards, loans or other debts can signal you are a high-risk borrower.
Checking Your Credit Report
Before reapplying for a loan, it’s wise to check your credit report so that you have a clear picture of your financial status. In the UK, you can obtain free copies of your credit report from Experian, Equifax, and TransUnion. Review your report and look for any errors or discrepancies which could be damaging your credit score. Dispute these with the credit bureaus to fix any inaccuracies.
Improving Your Credit Score
If your loan application was declined due to a low credit score, there are several steps you can take to improve it, here are some that could help:
- Pay all bills on time - Set up direct debits and carefully track payment dates to avoid missed or late payments. Even one late payment can significantly dent your credit score.
- Reduce debts - Pay off credit cards and loans with the highest interest rates first, as these are the costliest. Consolidating multiple debts through a personal loan could simplify repayments but also comes with risks.
- Avoid new credit applications - Applying for a lot of new credit at once can indicate you are desperate for cash and damages your credit rating. Aim to wait 6-12 months between applications.
- Correct any errors on your report - Mistakes on your credit report can unfairly drag down your score. Dispute any errors with the credit bureaus.
- Build credit history - Taking out and responsibly using a credit builder card can help demonstrate you are able to manage credit wisely over time.
- Consider becoming an additional cardholder - Being added as an additional cardholder on a partner or family member's credit card responsibly utilised for years can help build your score.
- Register to vote - Being on the UK electoral register can positively affect your credit rating.
Considering Alternative Lending Options
If traditional high street lenders like banks and building societies have turned you down, consider alternative lending options:
- Credit unions - These not-for-profit financial cooperatives often lend to borrowers who may struggle to get loans from mainstream lenders.
- ‘Buy now pay later’ financing - Lets you split purchase payments over several instalments. Missing payments can still impact your credit rating.
- Logbook loans - Secured against the value of your car. There is a risk of losing your car if you default.
- Guarantor loans - Involve a second person guaranteeing to make repayments if you can't.
Beware of Loan Sharks
While it may be tempting to turn to unregulated lenders or loan sharks, especially when you’re in a financial pinch, it’s important to avoid these at all costs. These lenders often charge exorbitantly high-interest rates and can employ unethical or even illegal collection practices.
Always ensure that any lender you consider is regulated by the Financial Conduct Authority (FCA). If you suspect illegal lending, report it to the Illegal Money Lending Team.
Don't Keep Applying
After being declined for a loan, it’s crucial not to keep applying for more loans immediately. Each application can leave a mark on your credit report, and multiple applications in a short period can make you appear desperate for credit, which can further harm your credit score.
Instead, take some time to understand why you were declined and work on improving your financial situation before reapplying.
Borrowing to Pay Off Other Debts
If you’re considering borrowing money to pay off other debts, it’s important to think carefully about this decision. While it can sometimes be a good strategy, it can also lead to a cycle of debt if not managed properly. Always consider the interest rates and terms of the new loan compared to your existing debts.
What Lenders Look At
Understanding what lenders look at when deciding whether to approve a loan can help you improve your chances of approval in the future. This includes factors like your credit score, income, employment status, and existing debts. Lenders also consider your history of managing credit and any recent credit applications.
How Being Declined Affects You
Being declined for a loan can have various effects, including potential damage to your credit score. However, it can also provide an opportunity to review your financial situation and make improvements. It’s important to remember that a declined loan application is not a reflection of your worth, but rather a signal that there are areas of your financial life that may need attention.
What to Do When You've Been Declined
There are several steps you can take after being declined for a loan, including checking your credit report, improving your credit score, considering alternative lending options, and seeking financial advice. It’s also important to understand why you were declined and to address any underlying issues that may have contributed to the decision.
Struggling to Borrow a Personal Loan
If you’re struggling to borrow a personal loan, there may be specific issues to address. This could include improving your credit score, increasing your income, or reducing your existing debts. It may also be worth considering alternative types of credit, such as credit unions or peer-to-peer lenders.
Seeking Financial Advice
If you’re consistently being declined for loans, seeking advice from a qualified financial advisor can help provide guidance on improving your financial health. A good advisor will:
- Review your full financial situation, including income, outgoings, debts and assets.
- Offer tailored advice and financial planning based on your unique circumstances and goals.
- Help you create a budget to manage your spending habits and maximise savings.
- Suggest ways to boost your credit score.
- Explain lending criteria and application processes.
- Discuss alternative financing options.
- Recommend any schemes or support you may be eligible for.
When choosing an advisor, ensure they are authorised and regulated by the Financial Conduct Authority (FCA).
Debt Consolidation Loans
If you have multiple debts across credit cards, store cards, overdrafts, and loans, consolidating them into one new loan can potentially help. Benefits can include:
- Simplified repayments - Make just one monthly payment instead of many.
- Lower interest rate - If you have debts on high interest credit cards, a consolidation loan can charge much less interest, saving you money.
- Fixed term - Having a set repayment period can motivate you to become debt-free.
- Improved credit - Making consistent payments on a consolidation loan shows lenders you can responsibly manage credit.
However, as with any loan, there are risks to weigh up:
- Large total debt - Consolidation can tempt you to borrow more than you need, or could come with higher interest rates, increasing your total debt.
- Missing repayments - Just one missed consolidation loan payment can negatively impact your credit score.
- Debts not resolved - If your spending habits don't change, you may end up back in debt again once the consolidation loan is repaid.
As with any major financial decision, shopping around, understanding the risks, and seeking professional advice is essential before committing to a debt consolidation loan.
Representative 14.8% APR
We are a broker, not a lender.
Representative Example: Borrowing £15,000 over 60 months, repaying £355.28 per month, total repayable £21,316.57.
Total cost of credit £6,316.57.
Interest rate 14.8% (variable).
The lenders on our panel offer loans for 12-360 months, with rates from 4.7% APR to 42.6% APR.
The Representative Example is based on all loans paid out by lenders between 1st Jan 2022 and 31st Dec 2022.
Understanding the Risks of Borrowing
Whether applying for a small personal loan, considering a consolidation loan, or looking into alternative lending options, it’s crucial to carefully weigh up the risks of taking on additional debts:
- Ability to repay - Only borrow what you can comfortably afford to repay on time from your regular income.
- Impact of missed payments - Late or missing payments will damage your credit score and credit history.
- Spiralling debt - Taking on too much credit can result in unmanageable debt, additional charges and interest costs.
- Read the fine print - Be aware of all applicable interest rates, fees, loan terms, charges and penalties to avoid nasty surprises.
- Seek financial advice - Speaking to a professional advisor can provide guidance on whether new borrowing is in your best interests.
- Don't use loans for non-essentials - Borrowing for holidays, luxury items or other wants rather than needs is rarely advisable, particularly if you’ve got a history of bad credit.
Declined for a loan? Debt Consolidation could help you get your finances back on track.
Being declined for a loan can feel disheartening. But focus on understanding the reasons why, then take steps to strengthen your financial position and improve your chances of future loan approval. Don’t be afraid to explore alternative lending options and get professional financial advice. Manage debts carefully, boost your credit rating where possible and only borrow what you can comfortably afford to repay. While it may take time and effort, with the right approach you can get back on track financially.
At Consolidation Expert, our experienced advisors are here to help guide you through your financial journey. Apply for a debt consolidation loan today to see if we can help you regain control of your finances.