It finally happened—the thing financial advisors often warn everyone about—an emergency has arisen that is sure to extend you beyond your means financially. Maybe your car has broken down and requires a serious investment to repair, or perhaps you're experiencing a loss of income from your partner getting laid off. If you need money now but can't get a loan, this can be incredibly stressful and impact more than just your financial wellness.
If this sounds like your current situation, there's no reason to be embarrassed. In fact, a survey issued by BankRate reported that 56% of Americans would have difficulty covering a $1,000 emergency expense with savings. That means they will need to use a credit card, borrow money from a family member, or use a payday loan to cover the expense.
When this situation arises, it's easy to go into fight or flight mode. Many people in that 35% are caretakers or heads of households. No matter the reason or amount, when someone needs cash fast because of an unforeseen circumstance, they deserve access to fair and compassionate lending. However, that opportunity doesn't always present itself. When a family is denied their loan applications for many reasons, it's easy to feel discouraged.
On the bright side, BrightUp focuses on uplifting communities that experience barriers to financial wellness with education and resources. As a result, getting through this financial emergency should feel a little less daunting for members of every community.
Understanding Why You May Be Denied for a Loan
After getting denied a loan when you need cash immediately, it's important to take the time to understand why. By learning how lenders make lending decisions, you can set yourself up for a more successful application process in the future.
Financial institutions need assurance that loan applicants have solid financial standing, and proof that they can repay the loan within their required terms when making lending decisions. In this way, personal loans often feel out of reach for those with little or no credit history or bad credit scores.
So what caused your loan to get denied? It could be one of many reasons.
Review the Decision from Your Lender
The first step to better understand why a lender rejected your loan application is by asking! Under the Equal Credit Opportunity Act (ECOA), lenders must tell you the reasons your application for a personal loan was denied or, at least, let you know that you have the right to ask for those reasons within 60 days of the rejection. They should provide this information upfront, so do not hesitate to ask if it's not! It is within your rights.
Some acceptable reasons include:
- Your income was too low
- Your credit score is too low
- Your debt-to-income ratio is too high
- You are new to your current employer
This same law states that lenders cannot deny you a loan based on your race, gender, national origin, marital status, or if you receive public assistance. So if you suspect they refused you for any of these reasons, you should report it to the Consumer Finance Protection Bureau immediately.
Suppose your application is denied based on your credit report. In that case, the lenders must also provide you with the numerical score, credit reporting company, a free copy of your credit report, and explain the process for fixing mistakes or adding new information to your report.
Do You Have Little to No Credit History?
The Consumer Financial Protection Bureau talks about the community with no recordable credit history as "credit invisible." The Bureau's research on this group estimates approximately 26 million Americans are credit invisible. Additionally, there are 19 million citizens who have credit records that are insufficient for scoring or have stale information that is unscored. These "invisibles" face significant challenges in gaining access to money through credit because lenders rely so heavily on credit reporting agencies to provide credit scores based on credit history.
Building credit is very much a "chicken-and-egg" scenario. So many young adults are lucky to depend on their families to help them pay rent and utilities during college. Others may never have had the chance to leave home to pay for bills independently. And so, you might ask - how in the world can I build a solid credit history if I can't get approved for credit?
There are some easier ways to build your credit history than getting a personal loan:
- Put utility bills like electricity, water, and your cell phone in your name
- Become a cosigner of a loan or an authorized user of someone else's credit card
- Get a secured, low balance credit card
You can begin to build a score-able credit history by making these small moves.
Is Your Credit Score Too Low?
Lack of credit score isn't the most common reason borrowers are denied. However, sometimes when you can't get a loan, it's because the credit history you do have is simply working against you. So what information do the three major credit bureaus—Experian, Equifax, and TransUnion—use to calculate your FICO credit score in your credit report?
We can break it down into five main categories:
- Payment history makes up 35% of a credit score. This measures whether or not you've had any missed payments reported in the last seven years.
- Credit utilization accounts for 30% of your credit score. This portion of the score calculates how much money you have as outstanding credit balances, also known as your credit-to-debt ratio.
- Credit history is 15% of the score. As discussed, this is the length of time you've had recordable credit. (Here's a quick tip: Don't close your oldest credit card account even if you don't use it! It can reduce your credit history!)
- Type of credit makes up 10% of your score. It is impacted by what kind of credit you have (i.e., credit cards, personal loans, student loans, etc.).
- Inquiries account for the last 10% of your credit score. This score element includes how many "hard inquiries" were pulled over the previous six months.
Knowing how the credit bureaus calculate your score can help you understand why you may have trouble getting a personal loan. For example, suppose you have a history of missed payments or haven't previously needed to access credit.
In that case, it's easy to receive a less-than-satisfactory credit report. But we believe hard-working folks deserve more chances to achieve financial wellness. So if it feels like you can't get a loan anywhere, it's not time to give up yet. We're on your side!
How to Get Money Without a Loan
Knowing more information about why applicants don't secure a loan can empower your next steps toward getting money without a traditional personal loan. Not all hope is lost. Many alternatives to your standard personal loan could fix your cash flow problem.
Before considering these other options, it's essential to take the time to review your current financial situation. Ask yourself a few questions before diving in:
- How much time do you think you will need to pay off the borrowed amount?
- What kind of interest rate do you think you can afford to pay on top of the borrowed amount?
- Do you have some credit to leverage?
- Does your employer have any financial benefits you can use?
Answering these questions ahead of your next steps will ensure clear expectations and avoid predatory lending scenarios.
Alternatives to Personal Loans
A quick search for "fast cash" or "I need money now" is likely to pull up thousands of pages of links to lenders promising instant access to cash. J.G. Wentworth's "8-7-7-C-A-S-H-N-O-W" jingle may start playing in your head. With so many options available, it's hard to know the most secure and responsible choice for your financial situation. But, on the bright side, your search may have also landed you on this article!
A personal loan isn't the only way to get money fast. There are plenty of ways to gain access to the cash you need even quicker.
- Emergency loans are one of the best ways to get the cash you need in a pinch, but you need to be aware of hidden fees and fine print. At BrightUp, one of our flagship offerings to employees receiving financial benefits through our program is access to the BrightUp Emergency Loan. This "compassionate capital" eliminates the predatory fine print borrowers run into with other emergency loans. For example, there is no required minimum credit score, and the loan has a single-digit APR.
- Payday Alternative Loans (PALS) are exclusively available at federal credit unions. This alternative to a high-cost payday loan allows members of credit unions to offer small amounts of loans ranging from $200-$1,000. You can find a federal credit union in almost any community, but you must already be a member for at least one month to access this kind of loan.
- Leveraging your 401k is another piece of advice you may receive when seeking out fast cash. If you've begun your long-term saving plan, taking out a short-term loan or requesting a hardship withdrawal could be a quick and easy way to get money. Just keep in mind your withdrawal may receive a penalty, and there will be a tax on the amount you withdraw. If you take out a loan, you'll need to plan to pay that money back plus interest within five years.
- Credit cards are typically a lot easier to get approved for, depending on the amount of money and kind of credit card you are trying to get. Some credit cards may offer an introductory 0% APR period, so make sure you feel confident that you can pay off the debt before the high-interest rate kicks in.
- Payday loans are another option to access cash quickly when you can't get a loan. However, this is the option we are least likely to recommend. Many payday lenders are often predatory and use attractive messaging to lock consumers into outrageous interest rates.
If you’ve explored all these options and continue to get denied for a loan, or don’t want to put your finances in danger, there is one other option to consider: borrowing from a family member or friend.
Pros and Cons of Borrowing from Friends and Family
If you're lucky enough to have a strong family or friend support system and have exhausted all your other options, borrowing from a family member or friend could be another alternative. But it's not without its pros and cons. The last thing you'll want is to put your relationship in jeopardy, so before you ask, consider the following.
Pros of Borrowing from Someone You Know:
- Faster access to cash
- Repayment terms may be more flexible
- If you miss a payment, they won't report you to the credit bureaus
Cons of Borrowing from Family or Friends:
- Repayment terms could be unclear
- Jeopardizes the relationship if you are unable to repay on time
- Loans and financial gifts have complex tax implications
If you decide to borrow money from a loved one, take the time to document clear terms and conditions for borrowing and repayment. In addition, make sure you understand any tax implications each party will need to consider when it's time to file with the IRS.
Position Yourself As A Reliable Borrower
The first step to becoming a reliable borrower is achieving financial stability. Congratulations! By considering all your options and making a well-informed decision about the best way to get money when you can't find a loan, you're taking that first step.
At BrightUp, our mission is to help workers and their loved ones grow their net-worth and improve their self-worth. We encourage every individual to make time to learn more about the financial challenges and solutions you may encounter in your lifetime. On our platform, users have access to a financial wellness program that can make this happen through:
- Compassionate Capital - In addition to emergency loans, we also offer refinance and debt consolidation loans for employees engaged with our financial benefits program.
- Financial Planning Tools - We provide access to tools like budget trackers and savings calculators to help team members improve their financial wellness.
- Personalize Financial Education - If this article was helpful, wait until you unlock the financial education content we’ve curated just for you.
- Financial Coaching - Gain access to financial experts to help you grow your wealth through text or phone.
We believe all families can build generational wealth, from improving their credit score to paying for their children to go to college. Sign up for financial education newsletters, follow your favorite financial advisors on social media, and never hesitate to ask for more information from your bankers.
You deserve to be financially healthy and holistically wealthy. We want to help you get there. BrightUp seeks to partner with employers to deliver comprehensive financial wellness benefits to their employees. If you believe our programs could benefit your workplace, explore our solutions and get in touch with a BrightUp Representative for more information.
Featured Image: Unsplash
Written by Slam Media Lab