How will a lender make a decision on my loan application?

Making a decision on a loan application is more complex than you might think. Lenders take numerous factors into account to build up a picture of how you’re likely to manage a personal loan. Every company will use their own scoring system, too, so there really is no ‘one size fits all’ way for lenders to make a decision.

In this article, we’ll share a bit of insight into how lenders choose who to accept and what rates to offer.

About credit risk and affordability

All credit companies, from mortgage providers to personal loan specialists, assess two main things when deciding whether to accept an application:

  • Credit risk: the likelihood you will default on payments for that specific finance product
  • Affordability: the likelihood that making repayments on a new loan would cause you to struggle financially

Each credit reference agency (the main three being Experian, Equifax and TransUnion) will hold their own credit file on you, which compiles public information and information provided by lenders of any financial products you’ve taken out in the past. In nearly all cases, a lender will review your credit file (provided by at least one credit reference agency) to help them decide whether to accept your application, and what rate to offer you.

Your affordability will also be assessed by the lender, who may look at your monthly income and credit commitments to determine whether you have sufficient income remaining for day-to-day living costs and other essential expenditure. If repaying a new loan would put financial strain on the applicant, this is likely to be a red flag to lenders.

While lenders use information provided by banks to the credit reference agencies to validate income, occasionally they may ask to see your bank statements to further assess your affordability. This isn’t a reflection on you personally; reputable lenders need to ensure they only lend to people who are in a financial position to afford the loan repayments.

Will my credit score impact my personal loan application?

There’s no such thing as one universal ‘credit score’. The scores credit bureaus often provide are simply illustrative. Different lenders will use different credit scoring systems to assess the specific risk of an application. So, even though you may think you have an excellent credit score, this doesn’t necessarily mean you’ll always be accepted for the loan you want or be offered the very best rates.

You should focus more on your credit history, which will be reflected in your credit report. Lenders review your credit report to help make their decision and most credit scoring systems are based on the information in your report, too.

There’s simply no way to craft the perfect credit report, and lenders wouldn’t expect you to. It’s an honest representation of your financial circumstances and the way you have handled money in the past, which gives lenders an idea of how likely you are to responsibly handle debt in the future. The most important things to look out for are:

  • Past credit behaviour – ensure you pay back any debt on time without making late payments or missing them altogether
  • Stability – make sure you’re on the electoral roll and your financial accounts are all updated to your current home address
  • Recent behaviour – show responsible money management by avoiding maxing out your credit card limits, or having too many hard credit checks showing on your file
  • Levels of debt – try to make sure your debt burden is affordable. Lenders are unlikely to accept your application if they think you won’t be able to take on any more credit commitments

How is credit scoring used?

While you don’t have one single ‘credit rating’ that is used across lenders and other financial organisations, individual lenders will use the information they have about you to calculate their own credit score for your application.

This credit score is an effective way for lenders to predict whether a customer is likely to meet their repayment obligations. Typically every lender uses their own credit score, which is developed by using statistical techniques to predict how likely you are to keep up to your repayments. This is done by analysing the past performance of other customers. If your credit file looks very similar to a group of customers who typically missed payments, then you’re more likely to be predicted to be a poor customer. If your file looks similar to customers who paid on time, then you would be more likely to be given a good score.

This scoring system may be used to determine which customers will receive the lowest rate, or which high-risk customers will be declined for a particular product.

Different lenders might feel differently about your application

Every organisation has their own ways to determine lending decisions that fits their product and the market. Just because one lender doesn’t feel you’re the right customer for that particular product, doesn’t mean you’ll be declined for every other loan out there.

That said, it’s never advised to take on a scattergun approach and apply for loads of different loans at a time. Every time you complete a full application, a hard credit check will be recorded on your credit file. Multiple hard searches suggest potential financial instability, which could understandably be a red flag for lenders – even though they won’t be able to see the outcome of these applications.

An alternative is to look for soft search functionality instead. Some loan providers allow you to see what rate you’d be offered, plus the likelihood you’d be accepted for a loan, with no impact on your credit score at all. This is a good route if you’re worried about hard searches having an impact on your credit score.

How can I improve my chances of my loan application being accepted?

There really is no set way to improve your chances of a loan application being accepted, as every lender will use different scoring criteria to help them make a decision.

Different personal loan products are specifically designed for certain customers. You could find that, if a low-APR loan isn’t deemed suitable for you, for example, you may be accepted for a loan product with a slightly higher interest rate.

There are multiple ways to improve your credit report and likely your credit score too, though how to go about this will depend on your own circumstances:

  • If you have very little past credit experience, your focus should be on naturally building up your credit profile over time
  • If you have experienced financial difficulties in the past, your focus should be on improving your affordability and lowering your credit risk. Make sure you can prove that, though you’ve struggled to repay credit previously, your situation and your approach to managing money has now changed by making reliable repayments
  • Perhaps you have a good credit history, but want the best chance of getting a low rate on a personal loan. There are a few basic things you can do, such as making sure you’re on the electoral roll and demonstrating you can manage credit cards with higher credit limits. However, as the best rates on the market are usually reserved for those with a spotless repayment record and near-perfect credit file, there may be factors at play that you just can’t change

Am I eligible for a loan with Novuna Personal Finance?

To be eligible for a personal loan with us, you must:

  • Be aged 21 or over
  • Be a permanent UK resident (and have been living in the UK for at least 3 years)
  • Be in permanent paid employment, self-employed or retired with a pension
  • Have an income greater than £10,000
  • Have a good credit history

To find out more about how personal loans work and what you need to ask yourself before applying, take a look at our expert guides.

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Novuna Personal Finance is a brand of Mitsubishi HC Capital UK PLC. Other brands under which we trade include Novuna Consumer Finance, Novuna Vehicle Solutions, Novuna Business Finance and Novuna Business Cash Flow.


Written by

Sophie Venner

Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business. In her spare time, you won’t find Sophie far from a notepad and pen as she squirrels away trying to write a novel.

Wednesday 7th June 2023