What loan companies look at before saying yes to a personal loan

Loan companies, or ‘lenders’ need to check a few things before they agree to lend money. They want to see if the loan is affordable for you.

They will look at:

• your credit score – this shows how well you’ve managed money before
• your income and spending – to see if you can afford the loan
• any debts or other payments – to check if you’ve already got a lot to pay out

Why your credit score matters

Your credit score helps lenders work out how risky it is to lend to you. A higher score shows them that you are more likely to pay back what you borrow, so you might be more likely to be offered a loan. A higher score can also mean a lower interest rate, which makes the loan cheaper for you.

Loan companies like to see things like:

• bills and credit cards paid on time
• you’re registered to vote at your current address
• your credit report is up to date and has no mistakes

You can check your score for free, and find out more about your credit profile, with credit bureaus like Experian and Equifax. You can also get a free credit check through our partner ClearScore.

Your income and spending

Lenders want to know you can pay back a loan and still have money left for your other living costs. This is known as your affordability. They will check things like:

• how much you earn
• how much you currently spend each month on essentials like rent or mortgage, bills, and other regular costs
• how much you have got left over to comfortably pay back a loan and for savings and emergencies

If your outgoings are already on the high side or you do not have much left over, lenders might decide a loan is not something that you can comfortably afford at that time. A loan calculator can help you to get an idea about what a personal loan could cost you over time, including your monthly repayments and the total repayment amount.

Too many loan or credit card applications can be an issue

When lenders see lots of ‘hard’ loan or credit card applications close together it can make them think you’re taking on new debts which might affect your affordability. It can also temporarily lower your credit score. This could cause lenders to offer you a loan with a higher interest rate, meaning it’ll cost you more overall. They might even say no altogether.

If this happens, instead of reapplying, consider using a loan eligibility checker. As eligibility checkers only tend to use ‘soft’ credit searches they can give you an idea of your chances for getting a loan without leaving a mark on your credit score.

If your loan application is turned down

Sometimes a lender says no because your income, spending or credit history does not fit what they are comfortable accepting at that time. If this happens, it can be a good idea to take some time out before applying in full again. Whilst ‘hard’ applications stay on your credit file for a couple of years, they have less impact on your credit score after a few months.

Taking a bit of time also allows you to understand and improve your position – to check your credit report and consider making changes like reducing your spending or paying off any other debts.

If you needed the loan sooner to help with bills or debt there is free support available. You can find trusted advice services at gov.co.uk, asking for help early can make a big difference.