It can come down to a single number.
- Personal loans offer consumers a flexible way to borrow money.
- If you do not find a reliable borrower, you may not have the option to take it out.
- Personal loans are unsecured, so lenders rely heavily on your credit score when deciding whether to approve you – or not.
There’s a reason so many customers turn to it personal loan if you need to borrow money. Personal loans allow you to borrow for any purpose, whether it’s a home repair, car repair, or small business.
Other types of loans are more restrictive. If you take out a car loan, for example, you can use the proceeds to finance a car purchase. And that’s all you can do with a mortgage loan is buying a house.
Personal loans also often offer lower loan rates. These days, it’s more expensive to borrow money across the board thanks to the interest rate hikes implemented by the Federal Reserve in 2022. But you’ll usually pay less interest on a personal loan than you do with a credit card balance (assuming you don’t have a card with a 0% balance on it).
But just because there are personal loans doesn’t mean you’re guaranteed to qualify for one. And if your loan application was recently rejected, the reason for that can be simple.
How is your credit?
Personal loans are unsecured, meaning they are not tied to a specific asset that can be used as collateral. When you finance a home with a mortgage, your home serves as collateral for that loan. Fall behind on your mortgage, and your lender can, in extreme cases, force you to sell your home to repay it.
Personal loans do not work like that. If you fall behind on your loan payments, your loan will be in serious trouble. That’s why personal lenders rely heavily on applicants’ credit scores when deciding whether to lend money.
It’s yours credit score it tells lenders how risky you are as a borrower. If you have a strong credit score, it usually tells your lender that you’re not in much of a risk, since you have a proven track record of paying your bills on time, when they’re due.
A low credit score, on the other hand, sends the message that you don’t usually do a good job of paying your bills on time. So if your score isn’t good, it’s easy to see why a lender might not want to give you a personal loan.
How to increase your score
If your less-than-stellar credit score is the reason you were denied a loan, the sooner you improve it, the bigger your credit score will be. One of the best ways to raise your credit score is to pay all your bills on time. You can also increase your credit score by paying off a bunch of existing debt if you have accumulated a large balance based on the amount of your spending money. Once you start make the most of your creditit usually drags your score down.
Finally, make a point to check your credit report for errors. You can order a free copy each week until the end of the year. Correcting mistakes that paint a negative picture of you as a borrower can result in a higher score.
Getting rejected for a personal loan is not fun, but it is important to know why that happens. And if a bad score is to blame, it’s worth taking steps to raise that number so you have more borrowers down the line.
Our picks for the best loans
Our team of independent experts scoured the fine print to find personal loans that offer competitive rates and low fees. Start by reviewing our options for the best personal loans.