You can get a personal loan with bad credit, but it may not be easy. A lender can reject your application if you fail to meet requirements.
Here’s more about why personal loans are denied and what to do if it happens to you.
[READ: Best Bad Credit Loans. ]
Can You Be Denied for a Personal Loan?
You can be denied a personal loan, just like you could an auto loan or a mortgage.
“A personal loan is not a slam-dunk,” says Michael Gerstman, CEO of Dallas-based financial planning firm Gerstman Financial Group. “Yet most people are surprised when they get declined.”
With an unsecured personal loan, which is supported only by someone’s creditworthiness, a lender takes a risk that the borrower will make payments and honor the terms of the loan. Lenders determine the level of risk by examining your finances.
“A lender will look at your debt-to-income ratio, your credit score, your income and your payment history,” Gerstman says. “All those things have to be in a line before they’re going to approve.”
A lender may also need to confirm that you are employed and review your pattern of employment.
“If every six months you change jobs for the last three years, that instability is a gray area,” says Jina Etienne, certified public accountant, financial planner and member of the American Institute of CPAs’ National Financial Literacy Commission.
While your job history alone may not disqualify you, your loan may be denied if you don’t meet all of the lender’s criteria.
[Read: Best Personal Loans.]
Does Being Denied a Loan Hurt Your Credit?
The good news is being declined for a loan does not hurt your credit score.
Your score will only be affected when the lender uses a hard credit inquiry to review your credit after you apply for the loan. This type of inquiry may knock down your score by a few points, whether or not you’re approved.
The drop is usually temporary, Gerstman says. Assuming you do everything right, your score should level out within a couple of months.
What Can You Do if Your Loan Application Is Denied?
If you are not approved for a personal loan, or any line of credit, you have the right to know why. That’s straight out of the Federal Trade Commission’s Equal Credit Opportunity Act.
The creditor must either provide the applicant an adverse action notice with the reason for denial or allow the applicant to request the reason within 60 days of receiving the creditor’s decision. Reasons for denial might include that your income was insufficient or that your credit score was too low.
“It’s not only your right but your responsibility to find out why you were rejected,” Gerstman says. “If you want to be a responsible credit holder, you have to find out why you’re declined.”
You might discover, for example, mistakes on your credit report that you can fix before you reapply.
“A denial doesn’t mean it’s a permanent no,” Etienne adds.
With so many details that go into an application, the lender may be willing to hear an explanation, she says.
If you talk with the lender and don’t think you can proceed, then you may decide to shop around for a loan provider with more lenient requirements. “You have the ability to take that response and go to Lender B and say, ‘I was declined because of this — do you think you’d be more open?'” Gerstman says.
But if your finances are in really bad shape, you may face extremely limited odds of approval. It only makes sense to keep shopping for a loan if you have a reasonable chance of approval. For example, if you’ve recently declared bankruptcy, you may need a year or two before you can expect to be approved for a traditional loan.
If you have tough credit issues to work through, try making those improvements before applying anywhere else. “Your credit score is fixable once you know what’s influencing (it),” Etienne says.
However, factors such as a high debt-to-income ratio are harder to overcome because you have less control over how much you earn and your monthly expenses, she points out.
You could consider bringing on a co-signer if the lender allows that.
“Just know that everybody on that loan can be held responsible for 100% of that debt,” Etienne warns. “It’s important to understand that when you ask someone to be a co-borrower, it can help you get the loan, but it’s a big ask.”
How Can You Improve Your Chances of Approval?
Doing your homework can improve your loan approval odds. Or, as Etienne puts it, “Underwrite yourself before you actually apply.”
Start by pulling your credit report. If anything seems off, you can investigate further and clear up mistakes.
Next, try to calculate your debt-to-income, or DTI, ratio: Tally up your minimum monthly debt payments, and then figure out what percentage of your income is needed to make those payments.
The higher your DTI, the harder your approval could be for a loan. Lenders typically prefer a DTI of 36% or less.
Once you see where you stand, you can begin to research lenders. Read lender reviews before you apply to find out what you can expect, including approval requirements.
“You can’t be an educated consumer unless you ask questions,” Gerstman says.
— How likely am I to be approved?
— If I am approved, what’s the highest interest rate you might charge me?
Most lenders can provide you some general information, and you won’t need to submit a full application.
You may be able to prequalify, which will tell you whether you’re likely to be approved, or ask for a rate check. The latter estimates the interest rates for your loan.
Both require a soft credit check, which does not hurt your credit rating.
[Read: Best Mortgage Lenders.]
How Can You Be Realistic About Your Chances for a Loan?
If you don’t think you’re likely to be approved for a personal loan, you shouldn’t apply. The more loans you apply for, the more hard credit checks you amass, which hurts your score and makes approval even harder.
Sometimes getting a loan is just not the best idea, Gerstman says.
“If your credit history is poor as far as on-time payments go, you may want to save yourself the exercise of going through this process,” he says, at least for a while. “Put some time between you and the negative marks on your credit history before you apply for a loan.”
Otherwise, do your due diligence to find the right personal loan for your needs: one you are not only likely to qualify for but also with the best terms.
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