If you've been turned down for a personal loan, you're not alone. As financial institutions tighten credit criteria, it may be more difficult to qualify for an unsecured personal loan. This fact sheet addresses possible reasons for being declined for a personal loan, and offers suggestions and possible alternative sources of funds.
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The Difference Between Secured and Unsecured Loans
A personal loan is considered an unsecured loan. This means that you provide no collateral for the loan, and the bank assumes the risk that you won't repay the loan. Unlike a car loan or a home loan, the bank has nothing to repossess if you don't repay a personal loan. In order to manage the high risk of making personal loans, financial institutions may only offer them to people with good to excellent credit
The Past Comes Back to Haunt You: You've Had Credit Problems
Sometimes, getting a loan can be like getting a job; you have to have experience to get hired, but if you can't get hired, how do you get experience? If you're trying to get a personal loan to consolidate other debts, the bank may be concerned that you'll get into debt again, especially if your credit report shows late or missed payments.
You Haven't Established Credit
You can be turned down for any type of loan if you haven't established credit. Banks may be more willing to make a personal loan if you have a track record with them. If you have a checking or savings account, ask the bank about taking out a small peronal loan. If you don't have a bank account, it's time to get one.
Credit Unions May Provide More Flexible Loan Options
Joining a credit union may offer better opportunities for getting a personal loan. You may qualify for a personal loan if you keep your accounts in good shape. Try to avoid borrowing money from "payday advance" lenders; they charge very high interest rates, and their loans are intended to be repaid within a few days.
Alternative to Getting a Personal Loan
Getting a personal loan can be a gateway to establishing credit; making payments on time can help you develop a steady repayment record. If you can't get a personal loan, you may be able to qualify for a secured credit card. These typically come with high finance charges incuding annual fees, processing fees, and high interest rates. The card is secured by a savings account for the same amount as your savings balance. Usually the spending limit is very low, but it can be a way to establish credit if you can't qualify for a personal loan.