Rejection hurts. And when you've been rejected multiple times for a loan you really need ... well, let's just say it's easy to get discouraged.
You're not alone. In 2018, LendEDU released data showing that 76 percent of personal loan applicants get declined. But there are ways to get your finances in order and apply again, not to mention other sources of funding. If you keep getting turned down for loans, read on to find out why it keeps happening, and what your options are.
1. "I've been refused a loan everywhere! Why?"
Possibility #1: High debt-to-income ratio
Your debt-to-income ratio is the relationship between your monthly debt-related payments and your gross monthly earnings. Only debt payments, such as your credit card and any loans, count toward this number – things like your utility bills and grocery budget aren't included.
Example: You earn $5,000 a month. You pay $1,500 toward your mortgage, $500 for your car loan, and $300 toward paying off your credit cards. Your DTI is (1,500+500+300) divided by 5,000, or 46 percent.
If you're applying for a mortgage (or second mortgage), lenders usually want to see a DTI of no more than 43 percent. In general, though, you want to keep your DTI under 36 percent.
Possibility #2: An empty credit profile
If you're young or you haven't taken on much debt, lenders don't have information that they can plug into their algorithms and find out whether you're a responsible borrower. You might have a good salary and no credit card balances, but if the lender can't prove that you pay on time, he or she might reject your application.
Possibility #3: Bad credit
This is the most common reason why people get declined for loans. LendEDU reported the average credit score of an approved borrower as 741, yet the average credit score nationwide is just 687. No wonder more than half of applicants get declined – the average American doesn't even qualify.
Some lenders have higher minimum credit scores than others. According to LendingTree, USAA Bank requires borrowers to have a score of 700 or above, while Tower Federal Credit Union will take borrowers with a credit score of just 580.
2. "I know what the problem is, now how do I fix it?"
If you know why you were rejected for a loan, you can look into what it would take to fix the problem.
If your DTI is too high ...
... you need to bring it down, either by increasing your income or reducing your debt.
If increasing your income was easy, everyone would do it, but there are some ways to give yourself a boost. Consider taking on another job, seeking out freelance opportunities, or even requesting a salary increase.
Remember, DTI is about monthly income and expenses, so one-shot earnings won't cut it. Don't go selling your furniture just yet.
To reduce your debt, first figure out how much you can allocate to paying off your accounts. The two most popular methods are:
The snowball method: Pay off the minimum on all your debts and allocate whatever else you can to the smallest debt. This tends to reduce your number of debt accounts faster.
The avalanche method: Pay the minimum on everything, but focus the rest on the highest-interest debt. With this method, you end up paying less overall because you're reducing your interest faster.
If your credit history is minimal or nonexistent ...
Open a credit card. Secured cards exist specifically for borrowers with no credit or poor credit. You need to make a deposit to open one, but they're great for building up your credit by borrowing responsibly.
If you have bad credit ...
First, make sure that your credit report doesn't contain errors. (It's more common than you'd think. According to the Federal Trade Commission, 25 percent of consumers have at least one error in their credit reports.) If you find an error, file a dispute with the bureau that issued the erroneous report.
If your credit report is accurately poor, there are a number of ways to address that and get our score back up again. For example:
- Increase your credit limit on a card or two, and then don't use it. That way you're using a smaller percentage of your available credit.
- Open a card with a low-interest or zero-interest introductory offer. Transfer just as much of your outstanding balances as you can repay during the offer's active period, then pay it off before your rates go up.
- Write a letter of goodwill explaining your extenuating circumstances. Ask the lender to remove the debt in exchange for repayment.
- Hire a credit repair service (and make sure it's reputable).
Remember that when you're in the process of fixing your credit, taking on a new loan isn't usually the best idea. And that's fine if you can wait to apply for a loan until your credit score is higher, but if you need money now, you might need to consider alternatives.
Get the Money You Need and Fix Your Credit – Advice for Homeowners
If you have equity in your home, you might be able to use it to get the cash you need and bring your credit score up at the same time. And no, we're not talking about a home equity loan or HELOC. (Chances are good that you've already tried that anyway.)
You might be at the point where you've considered selling, which definitely would let you collect your equity. But even if you can afford to move, do you really want to go through the painful process of leaving your home?
Thanks to an innovative program called Sell and Stay, you don't have to. Created by EasyKnock, this program lets you can sell your property to the company and collect the equity you've built. But instead of moving, you stay on as a tenant and keep paying rent until you're ready to sell your home or move.
It's a straightforward process that lets you tap your equity without taking on the burden of another loan.
Break the Debt Cycle
Sell and Stay can help you go from “I need a loan but keep getting declined” to “I've paid off my debts and it feels great.” And it does that without adding more debt to your plate.
It's time to say goodbye to letting your finances limit you. Contact EasyKnock today and find out how to get started.