While there is no fool-proof trick to getting the green tick approval, there are a number of steps you can take to avoid rejection in the future.

What is a personal loan?

A personal loan is a financial product where you borrow money from a lender for purchases other than a home or investment property. You are required to make regular payments with interest over the loan term. This can be anywhere from six months to seven years.

You can use a personal loan for things including, but not limited to: home renovations, cars or boats, holidays, and weddings. Because personal loans tend to offer lower interest rates than credit cards, they are also often used to consolidate debt.

How are personal loan applications assessed?

Understanding why you were denied a personal loan begins with knowing how a personal loan application is assessed. If you apply for a personal loan, one of the first things a financial institution will consider is your credit score.

Credit score range illion Equifax Experian
Excellent 800 to 1,000 833 to 1,200 800 to 1,000
Very good 700 to 799 726 to 832 700 to 799
Average 500 to 699 622 to 725 625 to 699
Fair 300 to 499 510 to 621 550 to 624
Low 0 to 299 0 to 509 0 to 549

This is a numerical representation of the risk associated with lending you money. It considers every time you’ve applied for finance over the past five years, along with any judgements, payment defaults, or late payments of more than 60 days over the same period.

On top of this, your lender will consider your capacity to repay the loan by assessing your eligibility and suitability e.g. your earnings, expenses, and other debts. Use the InfoChoice Budget Planner to get an understanding of your financial situation.

Why was my personal loan rejected?

Before diving back in and immediately applying for another personal loan, it can be beneficial to understand why the lender refused you in the first place. Here are some of the most common reasons why a personal loan could be declined:

1. Bad credit history, or insufficient credit score

If you have a bad credit rating, that indicates to the lender you may struggle to confidently make the repayments. Lenders will likely take late repayments, missing repayments, and applying for too many applications within a short time frame as a red flag. Furthermore, if you have limited information on your financial history, a lender may have more reason to decline your application.

Many unsecured personal loan interest rates are also based on credit ratings, meaning if you applied for a competitive interest rate reserved for those with an ‘Excellent’ rating, but only have an ‘Average’ credit score, there’s every chance your application could be rejected.

Things are a little different in Australia compared to say the United States, where lenders aren’t so harsh when it comes to credit score. For example, your credit score might be ‘Average’ because you haven’t taken out debt before, but otherwise have no red flags on your report.

Comprehensive credit reporting means a lender will likely look for red flags on your credit report, rather than just your score. This is especially the case with secured lending.

2. Too many existing loans

If you have taken out multiple loans over the past few years (e.g. car loan, credit cards, etc) and still have large amount of debt, lenders may doubt whether you’re able to comfortably repay the loan. Existing debt also eats into your borrowing power - even ‘unused’ debt such as a credit card limit.

Certain debts are considered pretty benign, such as a home loan or secured car loan. However, if you have multiple payday loans and personal loans, this may give pause for a lender to accept your application.

3. Insufficient income

As part of the application process, you will be required to provide bank statements. Lenders often have minimum income requirements, so if your income is under this (differs based on the lender), they may reject your application.

4. Unstable employment

Lenders need reassurance you will make your repayments on time. The best way to guarantee this is to look at whether you have a stable working history. If you’re on probation, lenders may reject the application.

Even if you earn good money, a lender might reject your application because you’re on contract or casual employment. They will generally want to see you’ve been in permanent work for at least a few months at the same employer.

What to do when your personal loan is rejected

Receiving a rejection is not necessarily the end of the road when it comes to applying for finance. Different lenders have different lending criteria, so you may be successful with another personal loan application.

That said, applying for credit multiple times – and being rejected multiple times – may affect your credit rating and make obtaining a loan even more difficult in the future.

Here are some other things you can do to strengthen your future personal loan application:

1. Improve your credit score and history

Often the best thing to do is to repair your credit history and increase your credit score by proving that you can be responsible with credit over a period of time. If you can, obtain a copy of your credit report and check there are no mistakes and that all all debts listed are yours. If you do notice an error, speak with the relevant credit reporter to amend any issues. Lenders generally want to do business with quality borrowers, so taking the time to improve your credit score is important.

2. Set a personal budget and do your best to stick to it

Ensure you have a good savings record. This will show the lender that you’re responsible with your money.

3. Don’t miss any future payments

Pay your bills on time or even have them auto-deducted from your bank account. Electricity, internet and phone bills are reflected on your credit report - missed or late payments will be noted, so do your best to keep on top of these. If you have housemates or a forgetful partner, don’t let their laziness with bills hurt your credit history.

4. Consolidate any debt into one loan

The aim of a debt consolidation loan is to make it easier for a borrower to manage and streamline their repayments. It also means you only have to remember one due date and only have to pay one annual fee.

If you have multiple credit cards with balances accruing interest, you might also consider a balance transfer credit card. Many have promotional interest rates of 0% for a certain period allowing you to get on top your debt.

5. Avoid taking out more credit

Avoid applying for more loans and get your existing debts under control. Not only do existing debts eat into your borrowing power, every credit inquiry is lodged on your credit history - too many might be a red flag.

6. Talk to your lender

Ask them about your borrowing power the next time you make an application. They can give you an indication if you should improve your situation before applying.

7. Shop around and compare different lenders

Not only do you need to look at the interest rates and fees, different lenders may have different assessment criteria. To avoid being rejected, you should check the lender's credit requirements. Some lenders may be more forgiving, while others will state that your credit score has to be at a certain level. However be wary of those offering ‘bad credit’ loans - the interest rates and fees on these can be sky-high.

8. Be aware that getting rejected can hurt your credit score

Applying for credit opens a credit inquiry on your report. Having too many inquiries - i.e. too many applications - can reduce your credit score and be a red flag for the next lender. Chances are if you get rejected by one lender, you might get rejected for the next. So to avoid this, before applying with the next lender, look at improving your own situation first.

How to improve your credit score

To improve your credit score, you should strive to pay existing debts and bills on time, minimise new credit applications (too many can trigger hard credit inquiries), lower your credit card limit and also prove you have positive financial habits e.g. consistently saving money. Even paying off your utility bills on time can be a positive step.

If you’re struggling with current repayments, it may even be worth reaching out to your credit provider or lender for some financial hardship assistance. You could also consider speaking to a free financial counsellor.

How to choose a personal loan

If you decide to apply for another personal loan, you should always consider what's on offer. When you do, make sure you review the four key ingredients:

1. Interest rates

Consider whether you’d prefer a variable of fixed rate and the flexibility both options offer. Don’t forget to also check the comparison rate, which shows the true cost of servicing the loan e.g. it includes the fees.

Secured personal loans - such as against a car or term deposit - often feature lower interest rates, while unsecured personal loans might be more flexible as to how you use them, but have higher interest rates.

2. Repayment flexibility

Many variable rate personal loans allow you to make extra repayments and some fixed rate loans will also allow this, but there may be a limit on the amount that can be repaid early. However, be aware some loans will charge you a fee for making additional repayments.

3. Fees and charges

Some loans may charge multiple fees such as application fees, ongoing fees, late payment fees, or insurance fees. These can add up over time. If a loan has a low advertised rate but a high comparison rate, this is usually a good indicator that there’s a lot of fees.

4. Loan term and amount

Loan term length usually varies between six months to five years. The longer the loan term, the more interest you pay, but the lower your monthly repayment. Additionally, some lenders may offer a minimum and maximum loan amount so be sure to choose one that suits your requirements.

Be aware payday and short-term loans. Under the responsible lending obligations, lenders need to assess your credit worthiness and offer hardship programs. Lenders operating in the short-term space (less than 62 days) don’t necessarily need to do this, and tend to charge much higher interest rates and fees.

Once you’ve done this, ensure you meet the financial institution’s lending criteria before applying. If you’re ready to take out a personal loan, let InfoChoice help you compare personal loans.