Personal loans are ideal solutions for financial problems—they give people immediate help with a structured repayment plan. But what if you need a loan but have been refused everywhere?
If it seems like no one will give you a loan, don’t worry—you’re not alone. Millions of people are refused loans every year for a variety of reasons. But don’t give up yet. Read on to find out how you can still get the money you need, regardless of your credit rating.
Your Credit Report and Credit Score: Why They Matter
If you want to borrow money and can’t find a lender who will work with you, it’s likely due to your credit. Creditworthiness is an assessment of your ability to repay a loan. Your creditworthiness plays some role in every personal loan application process. And one of the most important tools lenders uses to determine creditworthiness is your credit score.
Your credit score is a three-digit number calculated from the contents of your credit report.
740-799: Very good
Credit reports give creditors and lenders information about your lifetime behavior as a borrower. Credit reports have five different components:
Your payment history is the most important component of your credit report. It is the record of any late or delinquent payments to your creditors. So if you’ve ever been late on a utility bill or stopped making payments on a rent-to-own appliance, it goes on your payment history. Payment history gives potential lenders a look into your habit of making on-time payments. Your ability to pay back a loan is what matters most to lenders. Some lenders routinely overlook your overall bad credit score if your payment history is good.
Payment History Tips
To maintain or improve your payment history, pay your bills on time. And when you can’t make your due dates, contact your creditors to work out an extension or adjust your payment plan.
Credit utilization refers to the amount of debt you carry on your lines of credit. It’s sometimes called a credit utilization ratio and expressed as a percentage. For the average lender, utilization comes down to credit card usage. Let’s say that you have a credit card with a $2,000 limit. At the end of the month, you have a balance of $500. That means that your credit utilization is 25%. Utilization shows how quickly you work to pay off debt, which is why its impact on your credit score is second only to payment history.
Credit Utilization Tips
While it’s important to avoid maxing out your credit, lenders also want to see healthy activity. Focus on keeping your credit utilization under 30%. Keeping two-thirds of your credit available can stabilize your credit score.
Your credit history is the amount of time you have been managing debt payments or a line of credit. It is also known as your credit age. Credit history is as long as your oldest active credit account. Experience as a borrower can impact your credit score, but only when you have a good payment history and credit utilization.
Credit History Tips
To maximize credit history benefits, you should keep your oldest account open. Canceling your credit cards shortens your history. When you pay off a credit card you no longer use, cut up your card instead of closing your account.
When applying for loans, credit cards, or financing, lenders look into your credit report. The most in-depth look into your credit report is called a hard inquiry. Every hard inquiry harms your credit score and stays on your credit report for up to two years.
New Credit Tips
Control the number of hard inquiries on your credit report by pacing your credit applications. If you are trying to get a personal loan, don’t apply for any other types of credit at the same time. Multiple hard credit inquiries can signal too much financial distress.
If you have different credit accounts—like a credit card and a car loan—you have a credit mix. Managing multiple accounts well can be helpful to your credit score, but overall this factor has the least impact.
How Does a Poor Credit Score Affect My Loan Options?
As you can imagine, good credit provides easier access to loans that have good rates and manageable terms. On the other hand, bad credit puts a borrower on a different path towards personal loans. “Bad credit loans” have different requirements and rates than conventional loans. But, they still provide a way to borrow money and manage the debt with fixed monthly payments.
Lots of people with poor credit have found success with online lenders. Some online lenders require just a few pieces of information, like valid ID and proof of income.
What if My Credit Report Is Wrong?
Credit bureaus are data collection agencies that create credit reports. The three major American credit bureaus are TransUnion, Experian, and Equifax. Each credit bureau uses algorithms to calculate credit scores. That means that your credit report and credit score can differ between the bureaus. You can check your credit score annually at each credit bureau for free.
You may also find and need to fix errors on your credit report. Which when left incorrected, hurt your credit score—and your ability to borrow money. Credit report errors can come in many forms:
- Information from someone else with a shared name
- Closed accounts that now appear open and past due
- On-time payments reported as late or delinquent
If you find any incorrect information on your credit report, you must fix it immediately. You can file a dispute with the bureau that has the erroneous information. Like your credit report access, filing a dispute is free. On average, it takes about a month to get a decision back on a dispute.
Other Reasons Why Your Loan Applications Got Denied
Even though a bad credit rating is a big part of getting a loan denied, there are some other reasons that potential lenders may deny your loan:
You’re Trying to Borrow Too Much
When you request a certain amount of money on a loan application, the lender will want to know if you’ll be able to make your payments. If you try to take out a personal loan for more than you can afford, you won’t get approved. Before you fill out another loan application, use this debt calculator to figure out what kind of payment plan you can afford.
High Debt-to-Income Ratio
Your debt-to-income ratio (DTI) measures how your debt relates to your monthly income. For example, if you make $4,000 a month and your debt payments are $2,500, your DTI is 62%. If you already have the bulk of your income consumed by debt, potential lenders assume that you won’t be able to manage more debt. Keeping your DTI below 35% will improve your chances of getting a loan.
You Don’t Meet the Criteria.
In addition to thresholds for bad credit, some loans have restrictions on how you use the money. Some personal loans, for example, can’t be used for college tuition. Other loans require a minimum income for every borrower. Every lender reserves the right to set its criteria. Knowing those criteria will help you find the loans that work best for you.
Why You Should Avoid Payday Loans
While you’re having trouble getting approved for personal loans, your financial problems aren’t getting any smaller. People who feel backed against the financial wall feel that their options are limited. This is the time that people turn to payday loans.
A payday loan is a short-term loan created to fill short-term financial gaps. The idea is that a payday loan will quickly cover your immediate expenses, and you repay the loan with your next paycheck.
Lenders that deal with payday loans advertise them as ideal solutions for finding quick cash. A payday loan typically requires no credit check—making them ideal for the bad credit borrowers that can’t get financing from banks or credit unions. In recent years, payday lenders have started providing quick cash loans online that can go from application to approval on the same day.
Their speed and availability have made payday loans popular. But there are many strings attached to a payday loan that can make them more than trouble than they’re worth. For starters, payday loans are expensive; they come with very high-interest rates. And with the average loan term of about two weeks, payday loans are difficult to pay down—especially for people who are already coming up short on bills. When you fail to repay the loan fully, your balance is considered a new loan. That means more interest and fees get piled onto your balance. This action keeps repeating until the payday loan balance is zero. This payment structure keeps borrowers on a debt cycle that can take months or even years to get out of.
Many payday loan borrowers find that the costs of a payday loan quickly overshadow their costs. Fortunately, some private lenders offer the same speed and accessibility for bad credit borrowers without leading them into a debt trap.
The Bottom Line
Looking for a personal loan solution can be tricky, especially with poor credit. Even though you don’t want to get caught deeper in debt, your need may blind you to the truth about dubious lenders that are committed to keeping you in debt for as long as possible. Make sure that you review all of your loan options carefully to know what you’re getting into. And keep the faith—there is a financial fix waiting for you.