It’s never easy to accept having your loan application declined, but it’s important to know why. Armed with that knowledge, you can then try to fix it. Let’s take a look at 3 common reasons why your loan application might be turned down:

Affordability is important

It could be a matter of affordability – a word that means something specific when the bank is considering your loan application. When you compare your monthly income to your existing monthly expenses, debt repayments and other financial commitments, the amount you have left over is called your discretionary income. Whether the bank considers a loan ‘affordable’ for you depends in part on how much of your discretionary income the loan repayments will take up.

So, a way to reduce the chances of an application being denied is to work out affordability, based on your own income and expenses, before you apply. Use our repayments calculator to work out how much you can afford to repay.

Apart from affordability, the bank will also consider your financial behaviour and financial history when considering a loan application.

Your credit history matters, too

In many cases, a loan will be declined because of a poor credit record.

Your credit record is like a ledger that contains details of your current and past financial behaviour. It’s a history of all the debt you’ve had, or still have, and how you’ve managed that debt. It includes things like cellphone subscriptions, credit cards, personal loans and any other credit you repay monthly.

Missed payments or late payments leave black marks on your credit report and lower your credit score – black marks that could stay on your record for as long as 3 years. A poor credit history and a low credit score is a red flag that warns prospective lenders of higher risk, and it could be the reason your loan application is declined.

This is another good reason to check your credit report, once a year.

Too many loan applications are a no-no

When you’re turned down for a loan, you might be tempted to simply apply for another loan at a different lender – or other forms of credit, like a credit card. This could be a mistake.

Remember: a certain amount of well-managed debt can improve your credit score

Every time you apply for credit, this goes into your credit record. If lenders see that you’ve applied for several types of credit or multiple loans in quick succession, they see red flags – in other words, a potential problem.

Multiple applications in succession could mean someone is trying to get as much credit as they can because they foresee cashflow problems ahead. If they take on too many loans, they could also struggle to repay them all – another reason too many applications will affect someone’s credit score.

What to do if your loan is declined

If your loan is declined, you won’t know whether it was because of 1 of these 3 reasons or another factor. But if the reason was ‘too many applications’, immediately applying for loans with other lenders will only make things worse.

That’s why it’s best to talk to the bank, right away, and find out why your loan application was refused. If the problem is affordability, your lender may be able to advise you on how to restructure your credit portfolio so that the loan is affordable. Or the solution might be setting your sights on a smaller loan.

If the problem is your credit record, take comfort from the fact that you can restore it over time. Your service provider can advise you on what steps you can take to improve it.

Remember: a certain amount of well-managed debt can improve your credit score. A loan can be a force for good.