When you are in need of financial assistance, being declined for a loan can be frustrating and disheartening.

It is important to understand the possible reasons behind the loan rejection as it may help you improve your chances of being approved in the future.

Here we explain some of the reasons why applications for credit are declined:

Insufficient credit history

Insufficient credit history is a common reason for loan rejection. When you apply for a loan, lenders typically assess your creditworthiness based on your credit report. This includes your payment history, any previous loans and credit accounts. If you have little, or no credit history, you may be considered a higher risk borrower.

Low Credit Score

Lenders may also consider credit scores when assessing loan applications. Based on various factors such as your payment history, outstanding debts and credit usage, a credit score is a numerical representation of your creditworthiness. If you have a low credit score your loan application may be declined because you are viewed as a higher risk borrower to the lender.

High debt-to-income ratio

A debt-to-income ratio compare monthly debt payments to monthly income. Lenders may perceive you as having insufficient income to meet additional loan obligations if this is too high.

CCJ's and missed payments

If you have a county court judgement (CCJ) or have missed payments, it you could negatively impact your ability to obtain credit for up to six years.

Insufficient income

To determine if you have the financial capacity to repay the loan, lenders evaluation your income level. Your application may be declined if your income is below the minimum requirement's of the lender.

Unstable employment history

You may be considered a higher risk to lenders if you have gaps in your employment or have a history of frequently changing jobs, as a stable employment history may demonstrate reliability and the ability to make regular loan repayments.

Current financial obligations

Lenders may be hesitant to provide additional credit if you already have numerous existing financial obligations or loans. If your debt burden is perceived as too high, it may be seen as difficult for you to handle additional payments.

Inaccurate or incomplete application

Loan applications are sometimes rejected due to incomplete information or inaccuracies. Make sure to double-check your application to ensure that you have provided accurate and complete information when applying for a loan.

Lender's criteria

When it comes to lending, different lenders will have different policies. For example, some lender's may only lend to customers over a certain age, or have a higher income requirement than others.

If you have been rejected for a loan, it may be a good time to check your credit report.

Taking the time to review this could be beneficial for several reasons:

1. Financial health and creditworthiness: Your credit report provides you with a comprehensive overview of your financial health, helping you to understand how your creditworthiness is perceived by lenders.

2. Knowledge: By examining you credit report, you can identify factors that may have led your loan application being declined, such as a low credit score, outstanding debt or a high debt-to-income ratio. This knowledge can help you take appropriate actions, for example reducing your debt or improving your credit score, to help you improve your chances of obtaining finance in the future.

3. Rectifying mistakes: Any inaccuracies or errors on your credit report, such as outdated personal information or incorrect payment history, can negatively impact your creditworthiness, and this could contribute to you being being refused credit. By reviewing your credit report, you can identify these errors and take steps to dispute and rectify with the Credit Reference Agencies.

Editorial Disclaimer: This article was updated 30.05.2023

Opinions expressed here are the author's alone, and not those of any bank, credit card issuer or any other company. This article has not been reviewed, approved or otherwise endorsed by any of these organisations.

NB: The information on this page does not constitute financial advice, please do your own research to ensure that the product / service is right for your individual circumstances.