Although it is embarrassing to admit, I was denied a personal loan.
It was a few months later after my 2021 wedding, when my credit card balance had risen to an alarming level. I was able to pay the debt off faster by taking out a personal loan at a lower rate than my credit card. My friend had previously taken out a loan to this end, so I applied to the same lender as her.
A personal loan is a great way to repay debt. This article will tell you how to get a personal loan and what to do if you are denied.
What is a personal loan?
It wasn’t just me who was thinking about personal loans at that time. According to TransUnion credit bureau, 19.2 millions people had an unsecured personal loans in the third quarter 2021. That number jumped to 22 million a year later — a record.
Personal loans are money that you can borrow from a bank or online lender. The loan amount ranges from $1,000 to $50,000 and is usually unsecured. The loan is repayable in two to seven years with monthly fixed payments.
Personal loans are appealing because they can be used for anything from debt consolidation to home repairs. A personal loan can be used to pay off high interest credit card debt and save you money.
Finding the perfect fit
To find out where to go to obtain a personal loan, my friends suggested I ask them for their advice. One of my friends mentioned that she liked the online lender she used. Unfortunately, my choice of the lender was solely based on her recommendation.
Researching and determining which lenders I might be eligible for would have been a better option. Lender requirements differ between lenders. Although the minimum credit score required by the lender I applied for was not met, it didn’t necessarily mean that I was eligible for a loan.
It is important to shop around for the right loan, Yulia Petrovsky, a certified financial planner from Modern Financial Planning, Oakland, California, states.
“A lot clients, particularly younger people, might gravitate towards banks,” she said. “But in reality, it’s best to check out multiple institutions — banks online, lenders, credit unions — so you can see what is available.”
Petrovsky says that many lenders today use algorithms to determine applicants. While some lenders place more importance on your credit score than others, other lenders consider your income and cash flow.
Petrovsky suggests local credit unions as an option.
“Small lenders, like a credit union, may take your whole profile into consideration” when assessing an applicant’s application.
You must pre-qualify before you can apply
Before applying, I could also have pre-qualified with multiple lenders. You can compare rates and terms to find the right loan for you. Pre-qualifying online is possible with most lenders.
After you have found a loan that suits your needs and has a rate and payment you like, you can apply for a formal loan. Lenders will verify all information including income, employment, and Social Security numbers. While some lenders approve you immediately, others may take up to a few days.
A hard credit check is required for any application. This can help to reduce your credit score and will show up on your credit reports. My credit report now shows the hard credit check that was required for the loan I was denied for.
Check if you are eligible for a personal loan without affecting credit score
Answer a few questions and you’ll get rate estimates from multiple lenders.
Recovering after rejection
After being denied for the loan, I was sent a letter explaining that I had used too much of my credit limit. I chose to pay off my debt in another way.
Jasmine Bell is the founder of Bamboo Financial Partners and a certified financial planner in Tulsa. She says that there are two ways to reduce debt. The snowball method is used to pay off the smallest amount first, then move on to the next. While the avalanche method works by paying down the most expensive debt first.
Bell states that a lot depends on who you are as a person and how you feel. The avalanche method is mathematically more cost-saving. However, if you feel motivated by the debt being paid off, the snowball may be the best option.
I found the avalanche method to be most effective in paying down a portion of my credit card debt throughout 2022. After being denied for a loan, my experience has taught me how to assess my eligibility and find the best solutions for my financial situation.