Learn how to avoid being denied for a personal loan by understanding the loan process, finding the right lender, pre-qualifying, and recovering from rejection. Get expert insights and tips for obtaining and managing personal loans.

Questions Answered in this Article

1. What is a personal loan?

• A personal loan is a type of loan that can be acquired from a bank, online lender, or credit union without providing any collateral. The loan amount generally ranges from $1,000 to $50,000, and borrowers typically have two to seven years to repay the loan through fixed monthly payments.

2. How can one find the right lender for a personal loan?

• It is more prudent to determine which lenders you are eligible for by researching, as credit score requirements vary among lenders. Shopping around is essential in finding the right loan. Explore various lenders, including banks, online lenders, and credit unions, to determine what is available.

3. What is pre-qualifying for a personal loan, and why is it important?

• Pre-qualifying for a personal loan involves checking your eligibility for a loan with several lenders, enabling you to compare rates and terms and identify a loan that best suits your needs. The majority of lenders offer online pre-qualification with a soft credit check, which does not impact your credit score.

4. What should one do after receiving a rejection for a personal loan?

• If you receive a rejection for a personal loan, it is important to evaluate your eligibility for various loan products and take the necessary steps to identify solutions that fit your unique financial situation. Consider paying down debt through methods such as the snowball or avalanche methods.

5. What are the snowball and avalanche methods for reducing debt?

• The snowball method involves paying off the smallest debt first and then gradually tackling the next smallest, while the avalanche method entails paying down the debt with the highest interest rate first. The choice between the two methods largely depends on an individual’s preference.

How to Avoid Being Denied a Personal Loan

I feel somewhat ashamed to confess, but I was denied a personal loan. This occurred a few months following my wedding in 2021 when my credit card balance was still high due to the costly festivities. I believed that securing a personal loan with a lower interest rate than my credit card would enable me to pay off the debt more rapidly. Instead of conducting my own research and identifying the best lender for me, I opted to apply to the same lender as a friend who had recently taken out a loan for the same purpose. To avoid being declined for a personal loan, it’s essential to comprehend the process of obtaining one and how to find the right lender.

Understanding Personal Loans: Definition and Popularity

Initially, let’s define a personal loan. It is a type of loan that you can acquire from a bank, online lender, or credit union without providing any collateral. According to the TransUnion credit bureau, during the third quarter of 2021, there were 19.2 million consumers with unsecured personal loans. Fast forward a year later, and the number increased to a record-breaking 22 million.

The loan amount generally ranges from $1,000 to $50,000, and borrowers typically have two to seven years to repay the loan through fixed monthly payments. One of the reasons personal loans are popular is because they can be used for various purposes, such as consolidating debt or paying for emergency home repairs. Furthermore, obtaining a personal loan to pay off credit card debt with high-interest rates can help save on interest costs and reduce debt faster.

Finding the Right Fit: Shopping Around for Lenders

When I was looking for a personal loan, I sought advice from friends on where to begin. One friend recommended an online lender, and I hastily chose them without conducting any further research.

However, it is more prudent to determine which lenders you are eligible for by researching since credit score requirements vary among lenders. Just because the lender I applied to did not have a minimum credit score requirement does not mean I was eligible for a loan.

According to certified financial planner Yulia Petrovsky of Modern Financial Planning in Oakland, California, shopping around is essential in finding the right loan. Petrovsky recommends exploring various lenders, including banks, online lenders, and credit unions, to determine what is available.

Moreover, Petrovsky points out that many lenders use algorithms to qualify applicants, with some giving more importance to credit scores while others prioritize income and cash flow.

For instance, local credit unions can be a viable option as smaller lenders like them consider the entire profile when assessing an application.

Pre-Qualifying for a Personal Loan: Benefits and Process

Before submitting an application for a personal loan, it would have been a better approach to pre-qualify with several lenders. This would enable you to compare rates and terms, allowing you to identify a loan that best suits your needs. The majority of lenders offer online pre-qualification with a soft credit check, which does not impact your credit score.

Once you have found a loan with a suitable interest rate and payment terms that align with your budget, you can submit a formal application. Lenders will verify your information, including income, employment, and Social Security number. Some lenders provide instant approval, while others may take a day or two to approve the application.

It is important to note that the application process involves a hard credit check, which can marginally lower your credit score and appear on your credit report. Unfortunately, the hard credit check from the loan application that you were denied will stay on your credit report for up to two years.

Recovering from Rejection: Strategies for Paying Off Debt

Upon receiving a rejection letter that cited my high credit utilization rate, I opted to pay down my debt through a different approach.

Certified financial planner and founder of Bamboo Financial Partners in Tulsa, Oklahoma, Jasmine Bell recommend two popular methods for reducing debt: the snowball and avalanche methods. The snowball method involves paying off the smallest debt first and then gradually tackling the next smallest. In contrast, the avalanche method entails paying down the debt with the highest interest rate first.

According to Bell, the choice between the two methods largely depends on an individual’s preference. She says, “The avalanche method is mathematically superior in terms of cost savings, but if you feel motivated by seeing debt paid off, then the snowball method might be a better fit for you.”

For me, the avalanche method proved to be the best strategy for consistently reducing my credit card debt in 2022. My loan rejection experience taught me how to evaluate my eligibility for various loan products and to take the necessary steps to identify solutions that fit my unique financial situation.

Summary

• A personal loan is a type of loan that you can acquire without providing any collateral.
• Personal loans are popular because they can be used for various purposes, such as consolidating debt or paying for emergency home repairs.
• To find the right lender, it is more prudent to determine which lenders you are eligible for by researching, as credit score requirements vary among lenders.
• Pre-qualifying with several lenders would enable you to compare rates and terms, allowing you to identify a loan that best suits your needs.
• If you receive a rejection letter, you can opt to pay down your debt through different methods, such as the snowball or avalanche method.
• The snowball method involves paying off the smallest debt first and then gradually tackling the next smallest, while the avalanche method entails paying down the debt with the highest interest rate first.
• The choice between the two methods largely depends on an individual’s preference.
• The loan rejection experience teaches you how to evaluate your eligibility for various loan products and to take the necessary steps to identify solutions that fit your unique financial situation.