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Turned Down for a Personal Loan? Here’s How to Get Back on Track
Being rejected for a personal loan stings – there’s no doubt about that.
That said, it’s not the end of the world. There are, after all, effective ways to rebound from a personal loan rejection, and still get the money you need, when you need it.
“Being rejected for a loan is disheartening, but it doesn’t mean you can’t qualify in the future,” says Sean Messier, associate editor at Credit Card Insider.
To get back on track, leverage these tips from personal financial experts to rebound from a personal loan rejection and eventually get approved for a personal loan.
Ask why your loan was rejected. Lenders are required to tell you why your application was denied, and borrowers should take advantage of that scenario. “It’s a lot easier to prep for another application if you know what went wrong,” Messier says.
When a lender rejects a personal loan, they’re required to provide an “Adverse Action” notice which indicates the reason for the denial of the extension of credit and the sources of information used to make the decision. “While there are often many (15-20 is a common range) reasons listed on the adverse action form, the lender will only check the appropriate boxes that relate to the particular borrower,” says Marion Mathes, founder and CEO of CreditWorks.
Personal loans are typically denied due to insufficient income, poor credit history, and inability to verify personal information, among others. Consequently, the first step is to understand why you were not approved, and the next step is to “take action to improve your profile to avoid a future denial on the same basis,” Mathes says.
Start building credit. This doesn’t mean closing credit accounts – keeping open, unused credit
available is a positive to your credit score. “Yet paying down balances on credit cards to 30% or below
of the maximum will give your credit a quick boost,” Mathes notes. “If insufficient income is the reason
for the turndown, paying down debt reduces your expenses and gives you a better chance of getting
approved next time.”
“Remember, demonstrate your ability and willingness to manage credit, and you will get approved.”
Know your DTI. If you have decent credit but are still getting denied for a personal loan, your debt-to-income ratio (DTI) may be to blame.
“Your DTI ratio can be calculated by adding up all of your regular monthly debt payments (student loans, credit card payments, mortgage, car loans, etc.) and dividing it by the amount of money you make every month – think your primary job, spouse’s monthly income, and money generated from second jobs or side gigs,” says Anna Caldwell, a money management specialist at Beyond Finance, an online personal finance platform. “For general borrowing purposes, most lenders prefer debt-to-income ratios that are lower than 36%.”
If your DTI is too high, there are a few steps you can take to improve it, including the following,
- Increase your monthly gross income by negotiating a raise or taking on a side job.
- Pay off as much of your current debt as possible.
- Use your existing credit responsibly and avoid increasing your debt.
- Refinance your existing debts to help you pay them down faster.
Cut down personal debt. If you’re carrying a lot of debt and not making much money, personal loan providers may not view you as an appealing borrower.
“Pay off your credit card balances, and try to pay more than the minimum payment on loans and mortgages whenever possible,” Messier adds. “Not only can paying off your debts boost your credit scores, but it’ll lower your total debt load, too, which should help paint you as a more desirable borrower.”
Recognize what matters most to personal loan lenders. “Lenders look to a borrower’s ability and willingness to pay creditors on time, so credit history is key to getting approved,” Mathes says. “The best way to build a strong credit history is to pay your bills on time and demonstrate that you can pay credit on time.”
While being debt-free is fantastic, it doesn’t help your credit score unless you have a long history of having had debt that was paid as agreed. “Paying your bills on time requires some budgeting and money management, and although not complicated, many find it difficult to stick to their budget,” Mathes notes.
Get creative with credit cards. If you’re turned down for a personal loan and want to build your credit, using a credit card that you pay in full each month will help.
“Some credit unions and banks will offer a card to someone with a $500 limit if they keep $500 on deposit at the financial institution,” Mathes says. “This is the traditional way to build credit but requires the deposit upfront. Some lenders offer employment-based loans that allow those with poor or little credit histories to get a personal loan and the payments are reported to the credit bureaus, helping to build credit, making these a good option, as well.”
Be realistic. Being pragmatic and knowing the lay of the land can go a long way in landing that personal loan on the second try.
“Borrowers need to remember that lenders need to lend,” says Rick Orford, personal finance expert and author of ‘The Financially Independent Millennial.’ “However, lenders need comfort knowing that the borrowers will in fact pay back the loan.”
Understand that reality maybe the biggest key in rebounding from a personal loan rejection. Lenders do want to play ball with borrowers, but only when those borrowers bring their best financial selves to the game.
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Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.