If you’ve thought about applying for a personal loan recently, it might have crossed your mind that your application could be rejected. Not every loan application is approved, and if yours is turned down, it could be frustrating.
There are some common reasons why would-be borrowers aren’t successful. Once you know what they are, it may be easier for you to take steps to ensure those reasons aren’t present in your application.
Lenders in New Zealand are required by law to apply strict affordability and other checks before they approve a loan, to ensure they do not put anyone into a situation where they cannot afford to repay what they owe.
Sometimes, rejections are linked to problems with a person’s credit history, or concerns about their income stability or other debts and obligations.
Here’s a guide to help you understand what might improve your chances of your application being approved.
What Happens When a Personal Loan Is Declined?
If a loan is declined, it often happens after the lender has conducted credit and affordability checks on an application. Sometimes this means that a hard inquiry is recorded on the borrower’s credit history, which can make it a little harder to apply for lending in future, in some cases.
Applicants are usually told the reason for the decision, and it does not mean that a loan will never be possible. Having a good understanding of the reason why can often allow the applicant to address it in future applications.
Common Reasons Personal Loan Applications Get Rejected
Low Credit Score
Lenders need to know that you’re going to be able to pay your loan back, and a low credit score may indicate that you could struggle with this. Many lenders will have a credit score threshold under which they are more cautious about lending. A history of missed payments, defaults or collections could also raise concerns about your creditworthiness.
If your credit history shows a high level of credit utilisation – that is, you’re borrowing a lot of money – it could signal that you’re in a financially stressed situation and potentially may struggle financially with more borrowing.
High Debt-to-Income (DTI) Ratio
Most lenders are also concerned with how much debt a person takes on, relative to their income. If you have a high debt-to-income ratio, it may indicate that a large portion of your regular income is already dedicated to paying your existing debts, leaving less left over to service additional borrowing now. Most lenders are concerned about the affordability of loans rather than the specific size amount you want to borrow.
Insufficient or Unstable Income
Lenders want to see that you have a way to pay your loan back, and that usually means having a stable income. If your income is too low to satisfy the lender that you can afford the repayments, you may be turned down.
Sometimes, irregular or unreliable earnings from casual or contract work can be a problem. If you’re self-employed, you’ll usually need to show more earning history to prove that your income is reliable.
When borrowers have only been in a job for a short period of time, or their pay slips are inconsistent, lenders may want to wait until there is a longer history of income before approving the loan.
Too Many Recent Credit Applications
People who’ve made a lot of applications for loans in a short period of time can also sometimes face hurdles. It could indicate that you are under financial pressure and relying on credit to get by, which might make a lender worry about your ability to repay new loans. You may find that each application you’ve made has left a note on your credit file that future lenders can see.
Incomplete or Inaccurate Application Information
Loan applications can also be unsuccessful because they do not include all the necessary information. Sometimes, people might not have supplied the right documents, or they might have made an error with their personal details. There could be a mismatch between the income they declare and their bank statements.
Depending on the situation, this can slow the process and mean the lender has to go back and ask for more information, or it can mean the loan application is rejected.
Employment Status or Job History
In the same way that income is important, so too can your employment situation be. If you’re unemployed or in a probation period at work, lenders may want to wait until your income is more secure. Even people who are in work but who have been through a lot of job changes might sometimes have to show a longer, more stable period with the same employer to type of job, to be approved.
Lenders tend to prefer to see permanent employment arrangements rather than short-term contracts, but this can vary depending on the length of the loan term you are applying for.
How to Fix a Rejected Personal Loan Application?
A decline of your personal loan application does not have to be the end of the road. Here are a few steps you can take if you find yourself in that position.
Check why
Review the decline notification from the lender and determine the exact reason you were turned down.
Fix it
From there, you can work out what you need to do to address it. Do you need to pay down debt? Improve your income level? Or just spend a bit longer in your job to improve your income history? Knowing what the issue is can help focus your attention.
Check your credit record
If your credit history was a problem, it might be an opportunity to spend some time working on this. You can obtain your credit report from any of the three main credit agencies in New Zealand. Check for any incorrect defaults or missed payments – you can ask for these to be corrected. If anything is out-of-date, you may be able to fix it.
Improve your credit score
If your credit score just needs improving, you can do this by ensuring you make all your payments on time. Even paying your phone bill may help. You could also reduce the balances you’re carrying on credit cards and other loans, and avoid making any new credit applications while you’re focused on building up your score.
Lower your debt-to-income ratio
You may be able to improve your chances of success by paying down other debt, reducing unnecessary spending and increasing your income wherever possible.
Apply for a lower loan amount
If a lender is worried about the affordability of a loan, you may be able to improve your chances by lowering the amount you’re applying for. The lender may see this as a less risky proposition.
How Long Should You Wait Before Reapplying?
The reason why you were declined may determine how long you need to wait before you try again.
If your application was turned down over minor issues, you might only need to wait a couple of months. It might take up to six months to improve your credit score a little or reduce your debt. If the application produced major credit issues, you might have to wait longer. We can help you to get a sense of what might be the case for you.
If you immediately reapply without making any changes, it can increase your risk of rejection.
How to Strengthen Your Application Before You Apply?
Give yourself the best chance of success with these tips.
- Check your credit score before submitting an application: This will highlight any potential problems at the outset and give you a chance to address anything that might worry a lender.
- Calculate affordability based on income and existing commitments: Make sure that you’re comfortable you can afford the loan you’re applying for.
- Prepare accurate documents (ID, income proof, bank statements): Get your paperwork in order before you start your application so that you know you have it ready to go.
- Avoid multiple applications across lenders at the same time: We can help you determine which lender is likely to be suitable for your circumstances.
- Apply for a loan amount that matches your financial position: Only borrow what you need and what you can afford.
- Consider a co-borrower or guarantor if eligibility is limited: A co-borrower or guarantor may give the lender more reassurance that your loan will be repaid.
Frequently Asked Questions (FAQ)
Does getting rejected for a personal loan hurt your credit score?
It can do. We can help you get your application in shape before you apply to reduce the chances of being rejected.
How many times can I apply for a personal loan?
There’s no set limit. If you’re being turned down, though, it’s important to check why and see what you can do to address those problems before applying again
Can I reapply with the same lender after being rejected?
It can do. We can help you get your application in shape before you apply to reduce the chances of being rejected.
What credit score do I need for a personal loan?
This varies a lot. Generally, it’s easier to borrow money with a higher credit score, but there’s no hard and fast rule.
Will paying off debt improve my chances of loan approval?
It may do so if it means you have more of your income available to service a new loan and your overall debt-to-income ratio is lower.
Want to chat?
The better finance™️ team are personal loan experts and are here to help with any questions you might have. Get in touch today, and we’ll help you work out what might be possible.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
