Getting a payday loan isn’t automatic. Although choosing a payday lender with a high approval rate helps, your loan can still be declined. Why?
Changing business models
Before the FCA introduced a price cap on the total cost of payday loans, more than 50% of lenders profited greatly from late payment as well as default charges. The FCA was determined to change this by limiting rollovers, default fees and CPA attempts. These changes made unaffordable lending less profitable eliminating lenders who based their business on people who couldn’t afford repaying their loans.
Before the FCA cap, a payday loan of £200 could cost a borrower as much as £800 or more. After the price cap, the total cost of the charges were capped at 100% meaning a £200 loan can never cost more than £400 in total regardless of the amount of time a borrower takes to repay. As a result, the cap forced lenders to change their business models by tightening their criteria for lending which includes declining high-risk borrowers who they would have accepted previously before the cap.
The changing business models are evident according to the FCA given recent statistics indicate that lenders are only getting 20 to 25% of their revenues from borrowers who have problems making repayments. This represents a 50% deduction before the FCA cap. It is therefore evident that payday lenders have changed their lending models and are focusing on low-risk borrowers.
To get into more detail on why certain borrowers are denied payday loans, it’s important to look at different borrower profiles. Being denied a payday loan can be demoralising considering one applies for such a loan when you are in need of emergency cash. If one lender denies you a loan, it’s not advisable to try another lender but rather understand the reasons why your loan application has been declined.
Below are 3 main reasons why payday loan applications are rejected.
The current regulations require lenders to carry out affordability checks before approving any loan applications. The checks are done by assessing the applicants income vs. expenses to see if they are left with some money to meet loan repayments. If your loan has been declined because of affordability, you can focus on spending less or earning more. It isn’t recommendable to lie about your income and expenses just to secure a loan. Instead, find ways of making more money and reducing your expenditure. You can get a part-time job and cut on unnecessary expenses like restaurant meals.
2. Credit history
Although payday loan brokers like SwiftMoney can’t deny you a loan because of your credit history, most lenders factor in a borrower’s credit history before deciding whether they will give the borrower a loan or not. Most lenders may not tell you this, but it happens in most cases. High-risk borrowers tend to have a bad credit score. If that’s the case with you, there are measures you can take to improve your credit score and boost your chances of securing a loan in the process. Start by checking if there are any errors that may have damaged your score unfairly. You should also start paying your bills on time as this boosts your score over time.
3. Over-applying for loans
Payday loan lenders also tend to shy away from borrowers who apply for loans too much. Instead of submitting a loan application to every single lender you can find, take your time and make sure you met the lending criteria before you apply. Over-applying for loans won’t help if you don’t meet the eligibility criteria. Furthermore, over-relying on loans can make lenders raise your risk profile. It is actually better to focus on not needing short term loans in the first place through efforts like saving.
Payday lenders are declining more loan application now, more than ever. This is precisely what the regulator hoped for. The cap on cost has made it undesirable to target borrowers who have problems meeting their repayment obligations. Payday loan companies have adopted a new business model focused on low-risk borrowers. High-risk applicants have a harder time securing short term loans today. However, they can focus on passing affordability checks by increasing their income and reducing their expenses. Improving credit scores and applying when they meet the eligibility criteria given by lenders will also help increase chances of qualifying for a payday loan.