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

Friends and family may have good advice, but when it comes to choosing a personal loan, do your own research, too.
Ronita Choudhuri-Wade
By Ronita Choudhuri-Wade 
Edited by Kim Lowe

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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. 

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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.  

See if you pre-qualify for a personal loan – without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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