Did you recently try to take out a personal loan only to be disappointed to find out your application was denied? Rejection can sting, but don’t take it personally – a computer often makes the decision after all.
Evaluate Your Goals
If you’ve been denied, it’s time to take a step back before making your next move. There’s a decision matrix here, and it’s important to recognize the factors that go into the decision. You need to think through your goal for the personal loan, how quickly you need it, and how much you will lose or save by waiting for the loan as opposed to pursuing another funding option.
Here’s an example: A common scenario is that you’d want the personal loan to pay off debt. In that case, interest rates will play a big factor. If you could cut those rates in half by pursuing, say, a debt management program, then it might make more sense to abandon the personal loan idea altogether. On the other hand, if you’re working on home renovations, the personal loan might be a good option and you just need to do some credit rebuilding to qualify and earn the best interest rate possible. Perhaps, then, the most important factor is determining the purpose of the personal loan and deciding if it’s an immediate need or a want.
The steps that follow in this article are all options you might consider. Whether you use them (and in what order), however, is really dependent upon your specific situation and goal.
Check Your Credit Report for Errors
Most lenders consider applicants’ credit, although they may also take your current outstanding debts, your income, and the resulting debt-to-income ratio into account. Some lenders also look at your education level, employment status, and career path.
Being denied for a personal loan comes with an opportunity if the decision was at least in part based on your credit (and many are). By law, you have 60 days to request a free copy of the credit report and score the lender used to evaluate your application. Details on how to request the report and score should be on the letter of adverse action you’ll receive from the lender. The free report won’t count against the one free report per bureau per 12 months you can request on AnnualCreditReport.com.
Look over the credit reports closely for errors, such as a reported late payment when you have proof you made the payment on time. Disputing errors with the credit bureaus could get the mistake fixed, and quickly boost your credit score as a result. Note: The credit reports from the three bureaus may not be identical, and the absence of accounts or information may not be an “error.” Some creditors only report your payments to one or two bureaus, and the bureaus might have access to different public record information.
Some cases might be more serious than an error, such as an account you didn’t open appearing on your credit report. That might be an indication that you’ve been a victim of identity theft. You can dispute the accounts, add fraud alerts to your credit reports, and learn how to protect yourself from future attacks.
Take Time to Build Your Credit Then Reapply
In addition to receiving a free credit report, you can get a free copy of the credit score that the lender used. The credit score will be accompanied by up to five reason codes, the most important factors that are impacting your credit score.
For example, a reason code might indicate that you’re using too much of your available credit, or you had too many recent inquiries. As a result, you’d know that to increase your credit score you’d want to focus on paying down debts or hold off on applying for new accounts.
Sometimes the codes have their meaning written out, otherwise you may need to look up their meanings. The reason codes can vary depending on the credit-scoring agency and model. You can find an explanation for some FICO reason codes in this pdf and VantageScore codes on ReasonCode.org.
With the reason codes in mind, and perhaps with the assistance of a credit counselor, you can put together a plan to raise your credit score. Your chances of getting approved for a personal loan could improve over time as long as you stick to the plan.
Try Again with Another Lender
One option, although it’s one you want to approach with caution, is to try applying for a personal loan from different lenders. You might be able to get approved in spite of your initial denial. Requirements for applicants vary from one lender to the next and lenders may weigh factors differently.
There are two potential downsides to this approach. If you have poor credit or a high debt-to-income ratio you might be lining yourself up for one denial after another. A hard inquiry will get added to your credit report even if you’re application is denied, and it could hurt your credit score for up to a year (often there’s only a minor impact for a single hard inquiry). FICO is clear on the rules here when it says: “Inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months.” Too many recent hard inquiries could even make you temporarily ineligible for a personal loan from some lenders. One popular personal loan company has a policy that states: “You must have fewer than 6 inquiries on your credit report in the last 6 months, not including any inquiries related to student loans, vehicle loans, or mortgages.” So, tread carefully here.
The second potential issue is that even if a lender approves your application, it might not give you favorable terms. The loan could have an annual percentage rate (APR) that’s over 30 percent, you might not be able to borrow as much money as you need, and you might be stuck using a lender that charges an origination fee. In the end, you could wind up getting approved but turning down the loan offer.
Consider an Alternative to a Personal Loan
Your next step might depend on why you were considering a personal loan in the first place. If you wanted the money to pay for a vacation or home improvement project, perhaps you could put your plans on hold while you build your credit, lower your debt-to-income ratio, or better yet save up the money to pay for the expense in cash.
Perhaps you’re trying to consolidate high-interest debts, such as credit card debts, with a lower-interest personal loan. That can be a good money-saving approach to paying down debt, but a personal loan isn’t the only way to go about it. You might be able to use a balance transfer credit card with a 0-percent promotional rate to consolidate the debts and avoid paying interest during the promotional period.
Balance transfers have their downside as well, as many cards charge a balance transfer fee (often 3 to 5 percent), and the interest rate will jump up when the promotional period ends. You also might not get a high enough credit limit on the card to consolidate all your debts. But perhaps the biggest problem is that if you don’t qualify for a personal loan, you may have a tough time qualifying for a low-interest credit card offer.
A debt management program could be another option for debt consolidation and repayment. Credit counseling agencies charge a monthly fee to administer the service, but you’ll likely receive perks such as reduced interest rates and waived fees. At Clearpoint, the average client reduces their interest rates by about half. An additional benefit is that you’ll only have to manage a single payment to the credit counseling agency each month.
Be Careful with Some of the Alternatives
After getting denied, you might be drawn to lenders that advertise personal loans for people with bad credit or promise cash with no credit check. While it may be easy to get approved for the loan, they could put your finances in danger.
Payday loans are one example of a no-credit-check loan, and payday loan fees could be equivalent to paying a several hundred percent APR. Some people get caught in a vicious cycle of taking out payday loans to pay off other payday loans. Auto title loans are another potentially dangerous type of loan because you could wind up in a deep pile of debt and risk losing your car if you can’t make payments.
When you need money quick, perhaps during a medical emergency or to make utility bill payments, using a credit card could be a better alternative than a “bad credit personal loan.” There might be other alternatives as well. Some credit unions offer payday alternative loans (PALs) to members, or there could be faith-based or government-backed aid available in your area. For one-off incidents, some people may be able to ask friends or family for a temporary loan, or their employer for a paycheck advance.
Rejection is never nice, but getting denied for a personal loan presents itself with some opportunities. Carefully evaluate your goal with the loan and assess how quickly you need the funds. Take advantage of the free credit report to look for, and dispute, errors and use the credit score reason codes to steer your credit improvement efforts. If you don’t have a pressing need for the money, taking the time to improve your credit and debt-to-income ratio and then reapplying may be the best option. You could also try applying for a loan with other lenders, or consider alternatives to a personal loan.
If your need is urgent, be sure to avoid predatory lenders, who could lure you into harmful loan terms, putting your finances and property at risk. Instead, consider a free credit counseling session, which might help you understand the different options, and identify the ones that best fit your needs.