Denied a Personal Loan? This Could Be the Reason Why

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It could boil down to a single number. 

There’s a reason so many consumers turn to personal loans when they need to borrow money. Personal loans make it possible to borrow for any purpose, whether it’s a home repair, car repair, or small business venture.

Other types of loans are more restrictive. If you take out an auto loan, for example, you can only use the proceeds to finance a car purchase. And the only thing you can do with a mortgage loan is purchase a home.

Personal loans also tend to offer competitive borrowing rates. Now these days, it’s more expensive to borrow money across the board thanks to a string of interest rate hikes implemented by the Federal Reserve in 2022. But you’ll generally pay a lot less interest on a personal loan than you will on a credit card balance (assuming you don’t have a card with a 0% introductory rate on it).

But just because personal loans exist doesn’t mean you’re guaranteed to qualify for one. And if your personal loan application was recently rejected, the reason for that could be quite simple.

How’s your credit?

Personal loans are unsecured, which means they aren’t 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 could, in an extreme situation, force the sale of your home to get repaid.

Personal loans don’t work like that. If you fall behind on your personal loan payments, your lender is basically out of luck. That’s why personal loan lenders rely so heavily on applicants’ credit scores when determining whether to loan them money.

Your credit score essentially tells lenders how risky a borrower you are. If you have a strong credit score, it generally tells your lender that it won’t be taking on so much risk, since you have a tendency to pay your bills on time, when you’re supposed to.

A low credit score, on the other hand, sends the message that you don’t tend to do as good a job of paying your bills on time. And so if your credit score isn’t in such good shape, it’s pretty easy to see why a lender may not want to give you a personal loan.

How to boost your credit score

If your less-than-stellar credit score is the reason you were denied a personal loan, the sooner you boost it, the more borrowing options you’ll have. One of the best ways to raise your credit score is to pay all of your bills on time. You can also increase your credit score by paying off a chunk of existing credit card debt if you’ve racked up a large balance relative to your total spending limit. Once you start utilizing too much of your credit, it tends to drag your score downward.

Finally, make a point to check your credit report for errors. You can order a copy for free on a weekly basis through the end of the year. Correcting mistakes that paint a less favorable picture of you as a borrower could result in a higher score.

Getting denied a personal loan is no fun, but it’s important to recognize why that’s happened. And if a poor credit score is to blame, it pays to take steps to bring that number up so you have more borrowing options down the line.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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