Although lenders have become much more lenient in delving secured credit to borrowers in recent years, the Bank of England Credit Conditions Survey found that the availability of unsecured personal loans was much more restrictive.
But as the report went on to state, fewer unsecured personal loans are being offered to consumers, bt that hasn’t halted the demand. The need for unsecured lending has remained unchanged in the past months, and is only slated to rise as the year comes to a close.
Given the increased restrictions in the realm of unsecured lending, it wouldn’t come as surprise that more and more potential borrowers are being rejected during the application process.
Whether it’s attributed to a blemished credit or some other factor, being rejected for a sizable cash loan – especially when you need it – can be disheartening.
However, before you jump the gun and finance an expense with your plastic, consider all the lending options you have at your disposal.
Payday Loans
Payday loans are often associated with perilous financing. Interest rates are in the thousands, and the payback period is scrunched short. However, payday loans are a form of collateralized loans that use your next paycheck as leverage. Indeed, stellar credit is not a prerequisite to take one on.
Donald Morgan, an assistant vice president at the Federal Reserve Bank of New York, conducted a study some years ago comparing the costs of overdrafts versus payday loans. In accordance with his hypothesis, Morgan found that payday loans prevailed every time.
However, payday loans are still some of the costliest forms of financing. Although they’re often cheaper than an unauthorized overdraft fee, they should still be reserved as last resorts.
Authorized Overdrafts
Although their unauthorized cousins can cause financial heartache, authorized overdrafts from your bank can be viable substitutes for paying an expense off fast.
However, an authorized overdraft is more synonymous with a payday loan than unsecured personal loan, and should be used for an emergency.
Credit Cards
Credit cards may be one of the most popular ways people pay for expenses up to $5,000. And unlike payday loans or overdrafts, they’re extremely common and usually carry less of a stigma.
However, an escalating credit card balance can cause complete chaos if you’re not careful. “Unsecured personal loans may be less costly than [a credit card], unless you’re able to qualify for an extremely low, introductory rate,” explained Mitchell D. Weiss, a professor of finance at the University of Hartford.
If you were turned down for an unsecured personal loan based on credit score, there’s a good chance you won’t be offered a credit card at a stellar introductory interest rate. In that sense, using a credit card – instead of trying to bolster your credit score and wait to finance an expense – can cost you substantially more in the end.
Refinancing or Collateralizing
Of all the viable options to finance an expense upwards of $5,000, refinancing or collateralizing may be your best bet.
“Perhaps you have a car that you own free and clear or is worth more than the loan balance against it. If so, consider refinancing it to extract some equity,” explained Weiss. “Just be sure to keep the term short.”
However, as Weiss goes on to state, refinancing a home isn’t usually worth the worry, as people tend to mismatch their short term need with a longer-term refinancing that a mortgage requires.
If you don’t have a sizable asset up for collateralizing, consider using a cash savings. According to Weiss, cash is seen as the most valuable kind of collateral in the eyes of banks, so you’ll likely be able to leverage quite a bit more with savings behind you.
Ultimately, if you’re rejected for an unsecured personal loan, chances are there are some significant financial shortcomings that need tending to. Consider making time to allow your credit score to boost, as well as the time to research the best option for your loaning needs.
Tags: credit, unsecured personal loans