If you’re one of millions of Americans who's lost wages due to COVID-19, you may have thought about taking out a personal loan with your bank, perhaps for the first time. You might not have enough cash on hand to cover an unexpected car repair, or maybe it’s time to move forward with debt consolidation you’ve been considering for a while. But what happens if you’re planning on using a loan or line of credit with your bank but are denied?
There are a few possible reasons you’re being denied:
- Your credit score is too low - Since some loans are unsecured loans (they’re not tied to a vehicle, home, or physical collateral), lenders rely on your credit score as the most solid marker of your ability to repay. If your credit score is poor or fair, a lot of lenders will not consider you a candidate for a loan.
- You already have a lot of debt - Lenders consider your debt-to-income ratio before approving a loan. If you already have substantially more debt than the income you’re bringing in, it looks risky.
Here are four ways to get moving in the right direction if you don’t qualify for a personal loan.
Boost your credit score
Check your credit report for any glaring issues like misreported payments or credit taken out in your name that you didn’t apply for. Once your credit report is verified clean, you’ll want to take action to increase your score. This includes making timely payments on all outstanding debt, keeping credit card or other high-interest debt low, and potentially asking for a line of credit increase.
Pay off existing debt
If you’ve already got a lot of debt, don’t wait to begin paying it off. Instead, start strategizing. Two popular methods are a debt snowball (starting with the smallest value loan first) and debt avalanche (beginning with the highest interest rate loan first). Your target should be to keep a debt-to-income ratio of less than 30%.
Consider other types of loans
Some loans have less stringent requirements or use alternative tools rather than credit scores. Loans from some online lenders can have more generous criteria than traditional banks, or direct lenders could be a great option to consider if you need access to money quickly. Look for a reputable company that provides clear loan terms upfront, so you’re not caught off-guard when payment comes due.
Grow your income
There is a limit to how much you can cut, but no limit on how much you can earn. A boost in income can immediately change your debt-to-income ratio for the better. Consider asking for a raise at your current job, switching to a more lucrative position, or starting a side hustle. Many gig economy industries such as ridesharing or food delivery are booming in different parts of the country.
No matter which path you choose, know that there are options if you don’t qualify for a typical bank loan. Following personal finance best practices and increasing your credit score will only help build positive financial habits and options for the future.
Notice: Information provided in this article is for informational purposes only. Consult your attorney or financial advisor about your current financial circumstances.
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Original Source: What to Do if You Don't Qualify for a Traditional Bank Loan