How to apply for a personal loan and what to do if you're rejected

Have you been thinking about applying for a personal loan recently? Personal loans can be handy for many people and a practical financial solution in some cases.

 

In this article, we're going to take a brief look at: How to apply for a personal loan and what to do if you're rejected.

 

 

What is a personal loan?

A personal loan gives you almost instant access to a lump sum of money to use for practically any purpose. Personal loans are available from building societies, banks, and online loan companies.

You borrow a fixed amount and then repay it in monthly instalments with added interest.

Most personal loans are unsecured, so lenders base their decision entirely on your creditworthiness.

Because of this, personal loans are most suitable for borrowers with a regular income and good credit history. If your credit history is poor, you'll likely have fewer options and face higher interest rates and fees.

Is a personal loan the best choice?

Before rushing into getting a loan, there are certain things to consider before you determine that it's the best choice and right for you.

The main thing to bear in mind is that getting a loan will impact your credit score and could also affect your eligibility to borrow in the future.

So, if you are planning on purchasing a home within the next 6-12 months, you should avoid at all costs anything that reduces your credit score.

It's worth taking a step back and asking yourself the following questions to help decide:

Do you really need to borrow the money?

Work out what amount you think you need first. Do you have savings? If you do, would it be worth using them rather than borrowing funds and paying interest? You can always work on building up your savings later.

Could you raise the funds elsewhere?

Maybe you should consider alternatives to getting a loan to avoid paying high interest rates. It may or may not be an option to ask your family and friends if they could help, if you can reassure them that you can repay them within a specific timeframe.   

Also, if you're not looking to borrow a large sum, it would be worth considering a 0% overdraft or credit card to cover your needs. If you choose a 0% credit card, you must pay your bill on time and in full every month. 

What amount can you afford to borrow?  

If you've decided that a personal loan is the best option, you'll need to assess the costs. Take a good look at your monthly expenses and income and determine what you could realistically afford in monthly loan repayments.

It's easy to find online loan repayment calculators to help you work out what your monthly payments will be.

These tools will give calculations for varying loan amounts with different interest rates to help you choose an affordable option.

How good is your credit score?

Your credit score is a key factor that lenders look at when making loan decisions. Therefore, it's essential to check your credit score and credit report in advance when applying for a loan.

Lenders can reject you if you have poor credit, or if they do accept you, they could charge you much higher interest rates.

You can use any of the three leading credit reference agencies, Equifax, Experian and TransUnion, to check your credit report online for free.

If you notice any errors, you need to take the relevant steps to correct them. Also, if your score is low, you should find ways to improve it before applying.

If you're not sure and have queries, contact your credit reference agency; they should be able to help.

Compare loans with different lenders

There are hundreds of different types of loans available, so comparing loans from multiple providers is a good idea.

Lenders vary considerably regarding how much they'll loan you, repayment periods, the fees that they charge and the interest rates they offer.

To make sure you get the best deal possible, you will need to spend time checking what's on offer. It's worth starting with your bank or building society, especially if you are a long-term client.

Of course, there are online companies available that will likely offer a wide range of potential deals.

Check out various websites; most have facilities to request a call back if you supply minimal personal details. Some online platforms may offer more competitive rates and faster decisions.

Many lenders now offer handy eligibility checkers that help you assess the likelihood of being accepted for loans. Using this tool can help reduce the chance of lenders rejecting your application.

Be aware that they will run a soft credit check, but this shouldn't impact your credit score.

 

Prepare your information and documents in advance

If you've decided that a personal loan is right for you, collate the documents you'll need before you apply. You must be a UK resident and at least 18 years old, and you need to present certain personal information to the lender.

As with most financial transactions, you must supply proof of identity, address, income and employment status. You also need to provide bank statements and bank details.

Below are things you should get together; you may not need everything, but it's best to be on the safe side.

1. Proof of identity. The best things here are a valid UK passport or a UK driving license. However, if you don't have either, a birth certificate may be acceptable.

2. Proof of address. Lenders will ask for recent documents. For example, a utility bill, a council tax bill, a credit card or a bank statement. You usually need to supply your address history for the past 3 years.

3. Proof of income. If you're employed, you need your last 3 months' payslips and your most recent P60. Also, bank statements showing salary payments into your account. If you're self-employed, you need 2-3 years of SA302 forms from HMRC. Or your accountant's reference and business accounts for the same period.

4. Bank statements. These should be from the last 3-6 months for all your accounts. And they need to show in comings, outgoings, along with existing credit card and loan payments.

Complete the loan application and wait for the lender's decision

Once you have found a suitable loan that you want to apply for and have gathered your information and documents. Next, it's time to complete and submit your application.

Many prefer to do this online or over the phone. If your lender is your own bank or building society, you may be able to go to your local branch to get it done.

You'll have to provide complete personal and employment details, along with details of how much you want to borrow and how long you need to pay it off.

Long-term loans can cost more in interest in the long run but may reduce your monthly repayments.

You also need to tell the lender exactly what you are using the loan for, i.e. emergency repairs, wedding, debt consolidation, etc.

Importance of accurate information

It's vital to provide the lender with accurate information so that they understand your financial situation.

On receipt of your application, the lender will check your information to ensure everything meets their criteria. They will also run a hard credit check, which shows up on your credit report.

The purpose of the credit check is to help assess your eligibility. And it's used when deciding the amount, you'll be allowed to borrow and the interest rate the lender will charge you.

The lender needs to be sure they should lend to you by determining your creditworthiness.

Then it's just a matter of waiting for a decision. Sometimes lenders provide an instant or same-day decision, whilst others may take several days.

Be aware that multiple applications in a short period can temporarily reduce your credit score.

What happens if you're rejected

Even with careful preparation, the lender may decline your application. If this happens, you must ask why. UK lenders should provide the main reason for rejection.

There are a few reasons your application might have been rejected. Most commonly, it's issues with your credit report, such as fraudulent activity on your file, or missed payments in your history.

Or there could be a simple mistake somewhere in your file.

The lender may have reservations about your ability to repay the loan. Perhaps you don't meet a lender's specific requirements, such as a minimum income level.

It could be as simple as an error in your address information or another minor detail that you can easily sort out.

Whatever the reason for rejection, check if there's anything you can improve upon or change before reapplying. It's not a good idea to keep reapplying before identifying the issues.

Here are a few suggestions and alternatives to think about.

Try adjusting the Loan Amount or Term – smaller loans or longer repayment terms may improve your approval chances.

Improve Your Credit Score – pay down debts, make timely payments, and avoid multiple applications over a short timeframe.

Explore Alternative Lenders – check out credit unions or specialist lenders, who may have more flexible criteria.

Consider a Guarantor Loan – this is where a trusted person with good credit co-signs your loan.

Reapply when ready

If your application is rejected, and whatever your reason is for borrowing, don't be too discouraged. However, it's equally important to think carefully and not rush into multiple applications too soon.

The reason is that most applications for loans and credit get recorded on your credit report. Therefore, several refused loan applications over a short period could further damage your credit score.

Take the time to improve your financial situation, check your credit report, and research lenders that match your profile. After a few months, you'll have a better chance of approval from a lender when you reapply.

Final Thoughts

Applying for a personal loan in the UK can be relatively simple when you prepare in advance. Understanding your credit, gathering the correct documents, and comparing lenders will increase your chances of approval.

If you are rejected at first, don't despair. It should be possible for you to secure a loan in the future with minimal stress, provided you take the correct action.

With the correct planning, a personal loan can be a powerful and valuable tool to manage finances, consolidate debts, or fund essential purchases safely and responsibly.