Personal loan rejection: Reasons and how to avoid it

When you’re applying for a personal loan, there may be a number of reasons why your application lands in the reject pile. Having a loan application rejected can have repercussions on your ability to access further credit. While there is no fool-proof trick to getting approval, there are a number of steps you can take to avoid rejection.

The 4 primary reasons why your personal loan application was rejected

Your personal loan application may have been rejected if:

1. You have a bad credit history. If you’ve taken out loans before and missed repayments, or applied for too many loans, your credit history is likely to be affected. Lenders may take a patchy repayment record, or too many loan applications, as a red flag. As a result, your loan application may have been rejected.

   To avoid being rejected, you should check the lender's credit requirements. Some lenders may be lenient and allow for a few negative marks, while others will state that your credit score has to be good.

   If you're unsure, it's best to check with the lender before applying. You can also check your credit score with Finder for free. Only apply if you meet the credit requirements.

2. Your income is insufficient. As part of the application process, you’ll have to provide bank statements and details about your income. Lenders generally have a minimum income requirement, which you will have to meet to be eligible. If the lender feels that your income isn’t enough to cover repayments, they may reject your application. The minimum income required differs based on the lender.
3. Your employment may be unstable or insufficient. Lenders need assurance that you will make your repayments on time. The best way to guarantee this is if you have regular income. As a result, lenders consider how stable your job is. For the most part, they prefer stable, permanent employment. Lenders may also look into whether you’re still on probation.
4. You hold too many loans. Lenders will look into all your expenses when determining whether you can afford a loan. In some instances, you may already have other open credit accounts, including credit cards, car loans and a mortgage. All these loans add to your existing financial commitments. Lenders are obliged by law to lend money responsibly. With so many other credit commitments, they may feel that you’re unable to repay the loan.

What happens when I apply for a personal loan?

When you apply for a personal loan, the lender will check your eligibility and suitability for a loan based on a number of factors. These include the details you’ve provided, the lender’s own internal criteria, and your credit file. No matter what loan you apply for – whether it’s a personal loan or a home loan – the lender may perform a credit check.

Finder survey: How many times have Australians been rejected for a personal loan application?

What is a credit check?

A credit check is when the lender checks your credit file for your credit score and details on your credit history. This history includes other loans you’ve applied for and your repayment history. It helps lenders determine what kind of borrower you are – that is, whether you're someone who pays back their loans on time, or someone who has missed credit payments.

Your credit behaviour is reflected in your credit score, which may differ based on the reporting agency. For Experian and Illion, your score will range from 0 to 1,000, while for Equifax the range is 0 to 1,200. Your score determines your creditworthiness. A good score indicates that you have repaid your loans on time and are a responsible borrower. An average or below average score indicates that you’ve missed payments and may be a risky borrower.

In Australia, a good credit score is above 625 for Experian, with excellent above 800. For Equifax, good scores are above 622, with excellent above 833. Average scores are below 624 for Experian and 621 for Equifax.

Some lenders may provide loans for average score holders, but at a higher interest rate. Others may reject you outright. Your credit score, therefore, may play a role in your ability to get credit and in some instances your interest rate.

Expert insight

"A healthy credit score isn't built overnight, but every smart financial decision and action you take adds up over times."

Karen Eley

Certified Money Coach

What happens to my credit score when I apply for a personal loan?

When you apply for a personal loan, the lender may make a hard credit inquiry. This is when the lender requests your credit file from the credit reporting agency. The request is recorded on your credit report and will impact your credit score. A hard credit inquiry must not be mistaken for a soft inquiry. A soft inquiry is when your credit file is checked for reasons other than lending you money. They have no impact on your credit score and do not show on your file. Soft inquiries can include personal credit checks, insurance and employment applications.

What should I do if I don’t have a perfect credit score?

If you have a few negative marks on your credit score, it may be worth working on improving it. This, in turn, will help your applications for credit. Rather than applying and risking a rejection, it may be best to wait it out and build your score.

To improve your credit score, you should work on paying all your bills on time, including utility bills. You should also pay off as much debt as you can and lower your credit card limit.

Avoid applying for too many loans, as this can further affect your score. Too many applications in a short space of time will trigger many hard credit inquiries, which will further affect your credit score. Select a single lender, the loan that suits you best and for which you’re eligible.

Your credit score gets updated every month, so anything you do to improve it will help in the long term.

What can I do to strengthen my application?

Apart from checking your eligibility, income, employment and credit score, it also helps if you:

• Verify your details. Don’t give the lender a reason to reject your application by filling out incorrect details, or by submitting an incomplete application. Double-check your details before you submit, because the lender will verify them on their end too. Any inconsistencies may lead to a rejection. You should be 100% honest.
• Check restrictions. When applying, you’ll have to tell the lender why you’re applying and what you’ll use the funds for. To begin with, make sure your reason is credible and that your purpose matches the type of loan you’re applying for. You should also consider if the loan comes with restrictions on how you can use the funds. Some secured loans can only be used to purchase motor vehicles. Others, like green personal loans, can only be used for environmentally friendly upgrades to your house. Your loan purpose may not be covered or may be inappropriate for the loan.
• Check your collateral. If you’re applying for a secured loan, you’ll find that the lender has asset requirements. This could include the age or value of the asset. If your asset doesn’t meet their requirements, your application could be rejected. Check if your collateral meets the criteria. If you have any doubts, contact the lender before you apply.
• Apply within your means. You may need the loan, but if you can’t afford it, the lender will not accept your application. Always apply for a loan within your ability to repay, even if it means applying for a smaller amount. You’ll have a higher chance of getting your application approved.
• Maintain good account history. If you’re applying with a bank, having good banking history can help. Ensure you pay your bills on time, your direct debits are honoured and your account doesn’t go into arrears.
• Demonstrate you can save. Having a good savings record will tell the lender that you’re responsible with your money. It’s also a good indication that you’re able to manage money and regular loan repayments.

Do buy now pay later and pay on demand apps affect my ability to get a personal loan?

For the most part, this will depend on how you use these services. When you’re applying for a personal loan, you are expected to disclose all your debts. This includes your buy now pay later and pay on demand debts. These debts are part of your expenses and should be accounted for. Having outstanding debts will affect how much you can borrow, as it will be counted as a financial commitment. If your debts are high and the lender feels you won’t be able to pay your personal loan debt, your application could be rejected.

Depending on the service you’re using, there may or may not be a credit check involved. Some services may perform a credit check, so it’s best to look into that. Any hard credit check will appear on your file.

Additionally, if you’ve missed any of your repayments, or paid late, it may have been reported to a credit reporting agency. This, in turn, will have a negative impact on your credit file and how lenders will view your application.

In general, it’s best to approach interest-free products with caution. Being too reliant on them to get by may signal that you’re spending more than you earn. This, in turn, may work against you as the lender may consider you a risky borrower. If you’re using these platforms as a budgeting tool, it’s best to stay on top of your payments and use them responsibly. Demonstrate, through your repayment history, that you’re financially responsible and capable of meeting your financial commitments.

Frequently asked questions

• What can I do if I don’t meet the lender’s income requirements but need a loan?

  There are a number of other credit options you can apply for. Some of them don’t charge interest, and so can be more affordable. These include no interest loans, Centrelink advance payments, buy now pay later or pay on demand apps. There are also payday loans, which may have lower income requirements. These loans work out to be more expensive and should be approached with caution.

• What if I don’t meet the lender’s credit requirements?

  It may be best to work on improving your credit score by paying off your debts and demonstrating healthy financial habits. You could also apply for a bad credit personal loan. These loans can work out to be more expensive, and some should only be used in case of emergencies. It may be more worthwhile to wait it out and improve your credit score before applying again.

To make sure you get accurate and helpful information, this guide has been reviewed by Karen Eley, a member of Finder's Editorial Review Board.

Written by

Bria Horne

Writer

Bria Horne is a writer for Finder, with a specialist knowledge of personal loans, car loans and business loans. Originally from the UK, Bria has been a professional personal finance writer in Australia for over 2 years. She has an M.A and B.A in Philosophy and Literature from the University of Sussex, and previously worked on the UK’s leading hospitality publication. See full bio