What I Learned About Personal Loans — After Getting Rejected for One

This feels embarrassing to admit, but I got rejected for a personal loan.

It happened a few months after my wedding in 2021, when my credit card balance was still steep from that eventful weekend. I thought that taking a personal loan with a lower interest rate than my credit card could help me pay off the debt faster. A friend of mine had recently taken out a loan for this purpose, so I simply applied to the same lender she did instead of doing my own research and finding the right lender for me.

A personal loan can be a good way to pay off debt. Here’s what to know about getting a personal loan — and how to avoid getting rejected.

First, what is a personal loan?

I wasn’t the only person thinking about a personal loan at the time. In the third quarter of 2021, 19.2 million consumers had an unsecured personal loan, according to TransUnion credit bureau. A year later, that increased to 22 million — a record number.

A personal loan is money you borrow from a bank, online lender or credit union. It’s usually unsecured, meaning it doesn’t require collateral, and loan amounts generally range from $1,000 to $50,000. Borrowers typically have two to seven years to repay the loan with fixed monthly payments.

Personal loans are attractive because borrowers can use them for almost anything, from debt consolidation to emergency home repairs. Getting a personal loan to pay off high-interest credit card debt can save on interest costs and help you pay off debt faster.

Finding the right fit

Not knowing where to start to get a personal loan, I asked close friends for advice. One friend mentioned she liked an online lender she used. Regrettably, I chose that lender based solely on her recommendation.

A better approach would have been researching and determining which lenders I could qualify for since credit score requirements vary among lenders. The lender I applied to didn’t have a minimum credit score requirement, but that didn’t mean I qualified for a loan.

Shopping around is essential to finding the right loan, says certified financial planner Yulia Petrovsky of Modern Financial Planning in Oakland, California.

“A lot of clients, especially younger people, may gravitate towards a bank,” she says, “but in reality, it is best to check out several institutions — banks, online lenders, credit unions — to see what is available to you.”

Petrovsky also says many lenders these days use algorithms to qualify applicants. Some put more emphasis on your credit score, while other lenders weigh your income and cash flow more.

One option Petrovsky recommends is local credit unions.

“Smaller lenders like a credit union may take your entire profile into account” when assessing an application, she says.

Pre-qualify before you apply

I also could have pre-qualified with multiple lenders before applying. Pre-qualifying lets you compare rates and terms and identify a loan that fits your needs. Most lenders let you pre-qualify online with a soft credit check that doesn’t affect your credit score.

Once you’ve found a loan with a rate and payments that fit your budget, you can submit a formal application. Lenders will verify your information, including your income, Social Security number and employment. Some lenders have instant approval, but others can take a day or two.

An application requires a hard credit check that can shave a few points off your score and show up on your credit report. The hard credit check involved with the loan I got rejected for is now on my credit report for two years.

Recovering after rejection

After being rejected for the loan, I received a letter stating the reason: I had used a high percentage of my credit limit. I decided to pay down my debt another way.

According to Jasmine Bell, founder and certified financial planner at Bamboo Financial Partners in Tulsa, Oklahoma, the snowball and avalanche methods are two common ways to pay down debt. The snowball method pays off the smallest debt first and then moves on to the next, while the avalanche method pays down debt with the highest interest rate first.

“A lot of it depends on you as a person and what makes you feel comfortable,” Bell says. “The avalanche method, mathematically, is a better method in terms of cost saving, but if you’re going to feel encouraged by seeing the debt paid off, then the snowball could be best for you.”

The avalanche method worked best for me to pay down part of my credit card debt consistently throughout 2022. Through the experience of being rejected for a loan, I’ve learned how to understand my eligibility for loan products and the steps to take to find the right solutions for my unique financial picture.

Ronita Choudhuri-Wade writes for NerdWallet.

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Super Bowl LVII Kicks Off the 2023 Homebuying Season

Many neighborhoods are bound to be packed with cars on Feb. 12, as families, friends and fans gather to watch the Super Bowl. But cars may line up around the block the next day for an entirely different reason — open houses.

Trading foam fingers for rubber cleaning gloves, homeowners across the country will get ready to list their homes for sale. The day after the Super Bowl is considered by many in the industry to be the unofficial start of the homebuying season.

Consider a market like Massachusetts, which has a strong sports culture and cold winter months. Kristin Coppola of South Shore Sotheby’s International Realty in Duxbury, Massachusetts, has explicitly recommended that sellers hold off listing until after the big game. “It’s the New England mentality,” she says, as locals are in “hibernation” while they focus on the football season. Once the game is over, however, all bets are off. “It’s like a madhouse.”

As the 2023 NFL season comes to an end and the homebuying season begins, use this guidance to shop like a pro.

Focus on costs and affordability

Thanks to interest rates that are higher than they were last year, home buyers are getting less for their dollar. Competition may not be as fierce as it was during pandemic highs, but many home shoppers are now contending with tightened budgets. Those financial constraints limit the number of homes buyers can afford in an already shallow pool of inventory.

You should understand the full costs of homeownership, as well as how to position yourself as an attractive borrower to lenders and sellers.

A stronger borrower profile = better rates

Before you even begin browsing online listings, take a long look at your own finances.

A good place to start is your credit score, as lenders will typically want to see a score of at least 620. The best mortgage rates are reserved for borrowers with scores of 740 or higher. A lower rate will free up more of your monthly payment to go toward the principal, meaning that you could afford a home with a higher sticker price.

One fast way to help your credit score is to request a free credit report and dispute any errors. The credit bureaus have up to 45 days to investigate and respond to your claims.

You’ll also want to consider your debt-to-income ratio, as this is one of the major elements that lenders consider when reviewing your loan application. Borrowers whose total debts account for more than 36% of their monthly income will find it difficult to qualify for the best rates.

Develop a realistic budget

The median home purchase price in December 2022 was $366,900, according to the National Association of Realtors. Beyond the price of the home, you’ll want to factor in the additional costs of homeownership. These include property taxes, utilities and homeowners insurance, as well as the general costs of maintaining a home, such as upgrading appliances or replacing the water heater. If you’re buying in a neighborhood with a homeowners association, factor in those fees as well. You’ll also need to account for closing costs, which are typically 2% to 6% of the loan amount.

Don’t stretch your budget beyond what you can safely afford; instead, turn to your list of criteria and start making cuts where possible. That ideal 36% debt-to-income ratio includes your home loan. Calculating your existing monthly debts can give you a sense of how much of your remaining income you can comfortably use for mortgage payments.

Get preapproved for a mortgage

Buyers “need to be prepared to hit the ground running” to take full advantage of the seasonal spike in available homes, says Coppola. New listings in her market tend to peter out by Memorial Day, when locals head to the beach. One way to prepare is to start reaching out to lenders to get preapproved for a mortgage.

Mortgage preapproval will benefit you in a number of ways during your home search. It gives you peace of mind by confirming that you can qualify for a loan; it can help inform your budget; and, when you’re ready to make an offer, it will demonstrate that you’re serious and motivated to buy.

“A preapproval letter sends a clear message to sellers that these are strong buyers,” says Jessica Schenkel of Sagan Harborside Sotheby’s International Realty in Swampscott, Massachusetts.

Shop around and apply for mortgage preapproval from multiple lenders. This allows you to compare rate offers, as well as any associated fees.

Build your winning team

“An important play is finding a Realtor who will represent your best interests in one of the biggest and most important purchases you will ever make,” says Schenkel. “Not everyone will be a perfect fit.” Your agent will be an informed insider resource who can help you understand your particular market, including the challenges and competition you may face and where to look for homes within your budget.

Taylor Getler writes for NerdWallet.

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