11 Reasons Personal Loans Get Rejected (And How to Avoid Them)

It is never a good feeling to have a loan application declined. You have to go back to the drawing board, and often none the wiser for why you were turned away.

The reality is that it could be one small reason, or many big reasons, and a lender often cannot disclose these for both commercial reasons and protecting their future risk exposure.

But none of that helps you when you get that rejection notification.

So, in this article we will share the most common reasons why a personal loan application is declined and what you can do about it.

How a Lender Assesses Your Personal Loan Application

While every lender has their own unique way of assessing a loan application, there are plenty of clues to be found in the regulations.

Australian responsible lending obligations require a lender to determine if:

• The applicant can afford the loan without substantial hardship; and,
• Have taken reasonable steps to assess and verify their financial circumstances.
• The loan will meet their requirements and objectives.
• They are considered a vulnerable consumer.

The lender also has an interest in only lending money to those who can pay it back. Which dictates a series of internal rules that determine their risk tolerance.

If you remember this basic framework then it will be much easier to understand the reasons why a personal loan may be rejected.

And why some lenders are so inflexible when you talk to them about it!

11 Common Reasons Personal Loans Get Rejected

1. Failing the Serviceability Assessment (Can They Afford it?)

Loan serviceability is just a calculation of your household budget and if you can afford an additional repayment without the risk of financial hardship.

You must prove that you can afford your new loan repayments if you expect to be approved.  

Lenders calculate whether new loan instalments comfortably fit within your budget after factoring in your essential living costs, a reasonable level of discretionary costs, and existing debt obligations.

Some may also add an extra buffer on top just in case your circumstances change… or the price of everything goes up (again!).

This process is completed quickly and easily via digital submission and analysis of your bank statement data.

A decline from this often comes down to two main reasons:

• High ongoing financial commitments reducing your surplus cash.
• Irregular salary patterns reduce your reliable income.

We’ll talk more about income later on, but for now here are some practical steps you can take to improve your serviceability profile before submitting an application.

Assess Your Budget Before Applying

Total your net income, subtract all fixed living costs, and check whether your remaining budget can absorb the estimated loan repayment.

Leave yourself a decent buffer too. If you are down to your last dollar after your new repayments you may not be approved.

Reduce Expenses Where Possible

Payoff any debt that is nearly finished so you can free up that extra cash flow.

Minimise any discretionary purchases well in advance so your statements demonstrate a reduced amount of spending.

Be ruthless with your subscriptions and recurring expenses. Do you really need five streaming services this month?

This is a positive exercise to do regardless of any loan applications. Plus, if you find enough extra money in your budget you may not need to borrow at all.

Reduce Unused Credit Limits

Many borrowers mistakenly assume a zero-balance credit card will not affect their application.

Lenders assess your total potential commitments rather than just what you actively owe.

When calculating your borrowing power, your repayments will be calculated based on any unused credit being maxed out.

If you have a $5,000 credit card limit, but owe nothing, your repayments are calculated on the full $5,000.

As you pay down your credit cards it can be helpful to reduce your overall limit if you are planning to take on future borrowing.

Determine the Right-size the loan amount

If your available cash will not support your desired loan amount it is time to re-assess.

Perhaps delay the loan until you can afford your target amount, or adjust to a smaller borrowing if that suits your needs.

2. Volatile Income or Employment History

Not all income is created equal in the eyes of a lender!

A long term, full time, employee may have an easier time getting finance than a casual employee who earns the same on average but has wild fluctuations from week to week.

The lender also needs to be able to verify your earnings with confidence. This is usually done via bank statements in a similar way to your expenses.

However, if you have just changed bank accounts, changed jobs, or have missed recent salary payments (unpaid leave) then this will raise questions.

If a lender cannot accurately assess your income then the rest of the loan assessment falls over before it begins.

Below are some examples of income and employment scenarios that will require additional investigation.

• Recent job changes
• Active probation periods
• Volatile Earnings
• Casual or self-employment

None of these will necessarily exclude you from being approved for a personal loan as long as you can prove income reliability with clear documentation.

3. Income Verification Failures

You might earn enough to comfortably service a loan, but if there is no way to prove your earnings then your application will be declined.

Gusto Finance will always request the bank statements for the account where your salary is paid so the process is fast and seamless.

Other circumstances can be problematic. For example:

• Cash-in-hand wages so no deposits evident.
• Submitting statements for an account where your wages are not deposited directly.
• Business accounts where there is no clear wages payment.
• Inconsistent or a short duration of deposits.

Any of the above will trigger further enquiries from the lender so they can adequately evidence your income.

4. High-Risk Bank Transaction Patterns

When you submit your bank statements digitally there is a process that takes place that flags potential high-risk transactions that require closer inspection.

These potential red flags generally relate to anything that could indicate a risk of financial hardship or vulnerability (E.g. a compulsive gambler).

Below are some examples of transactions that may require further explanation:

• Dishonoured direct debits and overdrawn fees
• A high number of wage advances or payday loans
• High volumes of gambling transactions  
• Continuous ATM withdrawals.

There are always degrees of risk associated with these types of transactions.

For example, a trip to the pub on Friday nights where you visit the ATM 2-3 times in the night is different to someone who withdraws cash 10 times multiple times a week in a licensed venue.

Remember, a lender wants to see sensible budget management, they are not the fun police.

The good news is that even if you have had a difficult financial period, or perhaps been reckless with your spending, you will see the benefits of improved habits quickly.

Some basic steps you can take include:

• Plan for your regular bills and eliminate dishonoured payments.
• Synchronise direct debits with your pay cycle to minimise chance of further issues.
• Cut back, or eliminate, higher risk expenditure like gambling.

5. Defaults on your Credit File

If you have any adverse credit events on your credit report you may not be able to access any form of mainstream finance.

While every lender will treat the following differently, all are significant detractors from your credit worthiness:

• Unpaid financial defaults
• Unpaid utility defaults
• Court judgments
• Insolvency records (active or discharged bankruptcies and Part 9 debt agreements)

Specialist non-bank lenders, like Gusto Cash, also consider your bank statement activity and income stability. Which can help overcome past credit blemishes in some circumstances.

But there are thresholds that will lead to a declined loan application.

The fastest way to overcome these issues is to repay the outstanding debts. This will be visible on your credit report, and over time the marks will expire and drop off.

6. A Low Credit Score (Even Without Defaults)

There are a number of circumstances that will generate a low credit score that are not linked to a history of bad debts.

The adverse events mentioned in the previous point is the fastest way to nuke your credit score, but there are smaller events that also hurt your standing with the credit bureaus.

• Limited credit history leaves credit bureaus with insufficient data to calculate a reliable rating.
• High number of credit enquiries in a short period of time can indicate potential financial stress.
• Missed payments on current debts may be visible after 14 days (comprehensive credit reporting only).

With some lenders, your credit score must be over a set threshold to get your foot in the door.

Whereas some non-bank lenders are far more flexible.

Generally speaking, the higher your credit score the more choice you will have in the market when seeking a loan.

So it is important to pay things on time, space out your loan applications, and be consistent over time.

7. Centrelink Income Component  

Every lender will treat government payments differently under their credit policy.

Some income categories will boost your borrowing capacity (such as family tax benefits) and others may not be eligible to count as genuine income.

For example, Gusto Cash will decline an application if Centrelink benefits are the majority of your income (>50%), but will consider applications where it is an addition to employment income.

Whereas other lenders will consider finance for those whose sole income is Centrelink.

Unfortunately, there is often little someone can do to change this set of circumstances prior to making an application.

Instead, they would be best only applying to a lender with a policy to suit their income circumstances.  

8. Misalignment with Requirements & Objectives

When you apply for various types of finance you are often asked what the purpose of the loan is.

This may seem like an overreach from the lender at first. However, they actually have a legal obligation to ensure that the loan product meets your Requirements & Objectives as part of their assessment.

If there is a misalignment you could be declined, even if you tick every other box.

For example, if you are applying for a debt consolidation loan with Gusto Cash you are going to be asked what debts you plan to consolidate.

If there is $10,000 worth of debt, but you can only afford a $2,500 loan then you would be declined as the loan cannot satisfy your requirements.

However, if the same application wanted to consolidate $2,000 worth of debt and use the remaining funds at their discretion they could be approved for that loan.

To improve your chances of approval you just need to be upfront and honest with the purpose of the loan, and ensure that it is an achievable outcome with the loan amount you are applying for.

9. Incorrect or Incomplete Information Provided

A simple typo is unlikely to derail a loan application (unless you are uncontactable as a result), but anything that looks like misleading information will.

It is the obligation of the applicant to provide accurate and reliable information, and the lender to take reasonable steps to verify that information.

If there is a pattern of misinformation a lender is unlikely to persist with an application due to the increased risk of an inaccurate assessment.

Lenders often use automated systems to cross-reference your application against identity databases, credit bureaus, and income/expense categorisations.

Any discrepancy can trigger alerts for manual reviews or an automatic decline.

Legitimate errors are easy to fix but there is always that risk that your personal loan application is declined before you have the chance to do so.

The most common errors include:

• Name and contact information typos
• Address discrepancies
• Employment mismatches with deposit records
• Mismatch of declared and detected income (often due to before and after tax figures).
• Illegible uploads when documentation is required

So be careful when entering your information so your assessment can be completed both quickly and accurately.

10. Being Uncontactable

As you can probably tell from the 9 previous examples, there is a lot more to a loan application than filling in a form and hitting submit.

In most cases there is a need to clarify certain information, request additional documentation, or just provide context to a circumstance that catches the attention of the assessor.

But this cannot progress if you are not contactable.

While contact channels and times can be flexible to meet the needs of the applicant, there may be a point where the application is discontinued due to a lack of responsiveness.

Some lenders complete a credit check early in their process. So if you do not follow through you may have an enquiry visible on your report even if you don’t follow through.

So it is in your best interests to only apply for finance when you are serious about the need.

And afterwards, making sure you are responsive within a reasonable period of time so your application can progress to an outcome.

11. Internal Risk Assessment Rules

This has been left to last because no specifics can be shared, and no specific actionable information can be shared because it’s all behind closed doors.

Every Australian credit provider will have their own internal set of criteria for how they assess their loans.

The cheapest forms of finance often have the strictest set of criteria.

Ever tried to finance a car through a big 4 bank? Those single digit interest rates are very hard to qualify for.

Some criteria will be pass/fail. So, if you do not meet the threshold you will be declined.

Other criteria will have some form of discretion possible, or can be offset by other positive factors.

Some examples of common internal benchmarks can include:

• Residency criteria (E.g. Aus Citizen or certain types of visas).
• Minimum income thresholds and sources.
• Employment industry restrictions.
• Employment or residential tenure minimums.
• Maximum recent borrowing thresholds.
• Bank balance depletion rates.

There are hundreds of potential factors that could be used and an infinite number of thresholds for various levels of risk tolerance.

While there is no way of knowing the back end criteria, you can position yourself as a good potential borrower by implementing many of the tips shared in this article so far.

What to do if Your Personal Loan is Rejected

If your personal loan is rejected, you should go back through each of the 11 potential reasons and look for opportunities to improve:

• Your household budget
• Your bank statements
• Your credit report
• The stability of your earnings

What you should not do is immediately apply for another personal loan elsewhere. 

Further rejections can lead to a damaged credit score which can take longer to recover from.

So take the time to look at where you can improve your financial habits and you are more likely to be approved in the future.

If a loan rejection prompts you to take a thorough look at your financial situation and make improvements, then it could be one of the best things to ever happen to you.

Even small positive financial changes can compound over time and lead you to a much-improved position over time.

FAQs

What if I Need Fast Cash Now?

If you have been rejected for a regular personal loan, you might still qualify for a short term loan offered by Gusto Cash.  

With fast processing times and same day deposits you can be funded in no time. 

Click below to check your eligibility and the team will be in touch.