Getting turned down by banks should not come as a surprise. They follow stringent criteria to approbate a loan application. In addition to a stable income source, a decent credit report is also expected. A good credit score speaks volumes about your payment history. Regardless of a high-income source, banks will not accept your application if you have missed payments in the past.

Strict lending criteria often lead to rejection, but it is far from the end of the road. There are still some options you can consider to borrow money. Nowadays, you do not have to access only banks to borrow money. Direct lenders and credit unions are out there to help you. They follow flexible and less strict lending criteria as compared to banks. However, it does not mean that you can get approval despite a poor repayment capacity.

Reasons why banks reject your application

Before you start exploring other options, you must detect the reasons why banks turned down your application.

• Your credit score might be low. Banks do not accept applications from subprime borrowers as there is a high risk of default.
• Your income is not high enough to prove your repayment capacity. Unstable employment also reduces your chances of being accepted.
• Your debt-to-income ratio is quite high. Banks will likely assume that taking on a new debt will make it more challenging for you to settle your debt.

Knowing the reason will help you not to repeat those mistakes. If you prefer to take out a loan from private lenders or credit unions, make sure that you do not repeat mistakes that result in rejection, such as an unstable employment history.

Alternatives when banks turn down your application

Here are the alternatives that you can consider when banks turn down your application:

Credit unions

If your bank has rejected your loan application, you can consider borrowing money from a credit union. One of the reasons why banks cannot be a suitable loan provider is that they do not deal in small emergency loans. For instance, if you need £500, they will never entertain you even though your credit history is up to scratch.

Credit unions, on the contrary, provide small emergency loans too. It depends on your repayment capacity how much money you would be able to borrow from them. Subprime borrowers are also welcome, but they will not let you access a large amount of money.

They are more flexible than banks and offer loans at competitive interest rates. Credit unions generally target those who have a moderate credit rating.

Online lenders

Borrowing from online lenders is convenient. Despite a subprime credit rating, you can borrow money from them. Whether you need a £2,000 loan for bad credit from a direct lender or a £5,000 loan, you are eligible to get approved as long as your repayment capacity is strong. However, when you are borrowing a larger sum of money, you will need a good credit score. Subprime borrowers will end up with high interest rates, no matter how much money they borrow.

While online lenders offer competitive interest rates, they could be higher than those of credit unions. It is because of a less-than-perfect credit rating. Direct lenders are suitable when you need money urgently. The good thing about them is that they do not have rigid approval criteria. For instance, they can tailor the repayment term to your budget.

Peer-to-peer lending

There are various peer-to-peer lending platforms that help connect borrowers with individual lenders. This is a great way to borrow money at lower interest rates. However, you will get money when your credit profile seems appealing. Though peer-to-peer lending enables you to borrow money during emergencies and at lower interest rates than online lenders, it is not strictly regulated.

Borrowing from friends and family

If you have a personal network, you can utilise it to borrow money. Before rushing to direct lenders, you should consider seeking help from your friends and family. They will be willing to help you, especially when you do not need a large sum of money.

Borrowing from friends and family enables you to leverage flexible repayment terms. They may allow you to repay as your budget allows. In fact, they will not charge you any interest. If they do, it will be nominal. Undoubtedly, borrowing from friends and family is much cheaper than borrowing from direct lenders.

The only risk with borrowing from friends and family is that your relationship can be strained if you fail to meet your obligation.

Pay advance from employers

If you are an employee, you can consider borrowing from your employer as well. These loans are advanced against your future salary, so you do not have to pay any interest at all. If you have been a good employee, your employer must give you your future salary in advance. However, it is vital that you have been working with your current employer for a long time.

Employer loans are considered the best loans as they do not involve a credit check or interest payments.

Government schemes

You should also consider government schemes and grants. They are ideal if you need money for small emergency expenses. Government grants help tide you over when money is tight. These schemes can subsidise education and housing.

Government-backed loans charge the lowest interest rates as compared to direct lenders, credit unions, and other lending institutions.

How to ameliorate your chances of qualifying for loans next time

Here is how you can improve your chance of getting approved for a loan:

• You should keep up with existing debt payments.
• Make sure that your debt-to-income ratio is not more than 30%.
• Keep your credit utilisation ratio up to 25%.

The bottom line

If you have been rejected by your bank, you should consider other alternatives to borrow money, such as direct lenders, peer-to-peer lending, credit unions, employer loans, and government grants and schemes. However, you still have a decent credit rating and a strong repayment capacity.