Applying for a personal loan without proper deliberation may lead to its rejection. Understanding why your loan application was/could be denied can help you out next time you try to qualify for the loan. Here are the 6 most common reasons why your personal loan application might have been rejected.
1. Low Credit Score
Credit score is a number between 300 and 900, which basically reflects your creditworthiness and therefore, plays a vital role in a lender’s decision to give out a loan. Typically, lenders have a threshold credit score for sanctioning a personal loan. If your credit score is below this threshold, you will not get the loan. Applicants with no credit score might also face rejection as without credit history, your lender will have no way to assess your financial habits.
What You Can Do
Usually, a credit score of 750 and above is considered ideal for loan approval. If your credit score falls below it, improve it with right practices. If you haven’t checked your credit score and report yet, do it at Paisabazaar for free before you submit your next loan application. Besides credit score, we also offer free monthly credit score updates and credit advisory service to help you improve and maintain a high credit score for easy access to credit in future.
Alternatively, you can approach NBFCs for a personal loan as they have a lower credit score requirement than banks. However, NBFCs also levy a higher rate of interest on personal loans as compared to banks.
If you have no credit history, avoid approaching a lender with whom you have no history (such as no savings/salary accounts or deposits) as they may reject your loan application. In such a case, approach a lender with whom you have a salary account or existing relationship. Another great option that you may try is applying for a secure personal loan such as a loan against a fixed deposit.
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2. Multiple Loan Enquiries and Applications
When you enquire about the personal loan of various lenders, you may often end up applying for personal loan at multiple lenders. However, note that each time you apply for a personal loan, the bank makes an inquiry for your credit report with the Credit Bureau and checks your credit score. The credit bureau takes these as hard inquiries and mentions it in your credit report landing to a negative impact on your credit score. This ultimately makes you seem credit hungry in desperate need of finances to lenders and banks and puts a question on your financial credibility.
What You Can Do
The alternative to avoid rejection of personal loans due to this reason is to apply via an online marketplace like Paisabazaar. Here, you can explore and compare options across top personal loan lenders without letting it impact your credit score. Based on the offer, you can choose the lender that best suits your loan requirements.
3. Higher Existing Debts
Another reason for personal loan rejection is when your prevailing debts are on a higher side. If you currently have too many open credit accounts, such as credit cards and loans, your prospective lender where you are applying for a personal loan will consider that you are overburdened with credit and may end up in default. Your high debts make you stand at risk in the eyes of the lender, which may result in your personal loan rejection.
Sometimes, several borrowers intentionally minimise their existing debt repayments in the hope of getting a higher loan amount. However, this can easily misfire as lenders would refer to your credit reports before approving loan amount including all the existing debt obligations in it. Therefore, this sort of misinformation can also lead to the rejection of your personal loan application.
What You Can Do
Ensure that you borrow loans and credit cards as per your repayment capability, only when required. Avoid availing multiple loans if you cannot pay them feasibly. Further, even if you have borrowed multiple loans, keep a clean repayment record and ensure that the ratio of secured to unsecured loans is balanced. The number of unsecured loans in comparison to secured loans must be lower.
4. Income Criteria Not Met
Before giving out a personal loan, lenders want to be sure that they will get it back on time. To ensure timely repayment of the loan, lenders check the applicant’s income. Sufficient and stable income shows that you will be able to repay all your EMIs on time. This is the reason why it is easier for salaried employees to avail a personal loan, in comparison to self employed, as salaried employees have fixed income amounts and sources. Generally, most of the lenders have defined a minimum income requirement for salaried and self employed and if you have applied for a personal loan amount, which is more than your eligibility, then your loan application is likely to get rejected.
What You Can Do
To avoid this condition, you must talk to your lender before filling the application form. Additionally, you could also look out for NBFCs (Non-Banking Financial Companies) where your annual income is not the most important consideration. However, it is always better to calculate your personal loan eligibility amount as per your income, so that you do not end up applying ruthlessly and getting rejected. You can use Paisabazaar personal loan eligibility calculator to know the best offers on personal loans as per your income.
5. Unstable Employment History
Your occupation and employment history play a keen role in personal loan approval. Lenders prefer lending loans to people working in reputed organizations. So, if the company you are working for is unregistered or not-listed, your application might get rejected. Further, most banks offer personal loans to people who have a stable history of employment. If you do not have a stable job or have a history of quitting jobs multiple times, your personal loan application is likely to be rejected. Most banks want a customer with a stable employment or business and a regular income. People changing jobs at frequent duration are considered less worthy by lenders to get loan approvals or the offered personal loan interest rates are on higher side for those individuals.
What You Can Do
To ensure that you get your application for personal loan is approved, maintain a good employment record. In general, personal loan lenders expect that you have a minimum work experience of at least three years, with that of at least one year in the current organisation. In case of self employed, your business must be in existence for at least three to up to five years. This however, may vary across lenders.
6. Incorrect/Missing Document(s)
Your personal loan application is approved only after your documents are verified. If a document is missing or there’s an inconsistency of information in your documents, your lender will reject your loan application. Your personal loan application form is equally important as other documents you submit along with it. Details given in your personal loan application such as your name, age, income, address are important for lenders to generate the necessary information about you. If lenders find inaccuracies in any of these or other details mentioned in your personal loan application, your loan request will be rejected.
Also Read: What are the various things that I should consider before applying a personal loan?
What You Can Do
Check the list of documents required beforehand and be prepared with these in advance. If you are applying for a personal loan online, keep scanned copies of all documents, and if you are applying offline, take along originals with required copies. Also, ensure that your original documents are in a good condition. When it comes to your application form, filling up the details carefully and mindfully. Avoid overwriting, however provide required information precisely without any spelling mistakes. Fill your name and address details as mentioned in your KYC documents. Also, double check the information you provide before submitting your personal loan application.
While a personal loan keeps you prepared to face financial lows, it is equally important to be able to avail this loan. If your personal loan application is rejected once, it is recorded in your credit report, leading to your further inability to borrow funds easily. It is advisable to keep the above mentioned things in mind, and apply only when you are ensured that the loan application will not be rejected. If you feel that you lack any of the parameters, it is better to improve and then apply.