4 Common Reasons for Personal Loan Rejection & How to Avoid Them

Irene L. Joffman


Personal Loan is the most sought out loan product in the market owing to its quick processing time and not needing any collateral or guarantee to avail it. These days, personal loans are processed within hours and disbursed into your account instantly. 

Though personal loans are easy to secure, there are quite a few criteria to be eligible to get a personal loan. For instance, your income, your job type, age, and credit score play an important role in determining your personal loan eligibility. If the lender feels that you are lacking in any one of the criteria, they may reject your personal loan. So it pays to understand the eligibility criteria for personal loans before you apply for them. 

Top Reasons for Personal Loan Rejection

While you are learning about the eligibility for personal loans, you should also know about the most common rejection reasons for your personal loans. Here are the most common ones:

  1. Bad Credit Score: This is the most important criteria for your loan eligibility as well as rejection. Your credit score is your credibility! Lenders prefer borrowers with high credit score to ensure timely repayment of personal loans. CIBIL™ score or credit scores from any bureau ( Equifax, Experian, CRIF HighMark) will give you your score. If you have a less than satisfactory credit score, there is a very good chance of your personal loan getting rejected. Before you take a personal loan or any loan for that matter, ensure that you check your latest credit score for free. See where you stand and take the right steps to increase your credit score, thereby your loan eligibility. 
  2. Not meeting the income criteria: Now, loan repayment is a long term commitment. So lenders look for borrowers with a steady source of income to be able to make repayments. Though personal loans are available for both salaried and self-employed individuals, if your income is not sufficient or is unstable, the lender may reject your personal loan application. 
  3. Not submitting proper documentation: Documents are your proofs to establish the eligibility criteria. You have to submit all relevant documents as requested by the lender for a smooth loan application. If the lender is not satisfied with the documents submitted, they may very well reject your loan application. 
  4. Too many loans or liabilities against your name: Your repayment capacity is determined based on your ‘Income to Debt Ratio’. This ratio shows your available income after repaying all your existing loans and credit card bills. The borrower should have a healthy ratio to be able to afford another personal loan. Lenders do not prefer a borrower who has a low income to debt ratio which may lead to failure of EMI payments. 

The above rejection reasons are only the most common. There might be other reasons like not meeting the age criteria, working in an ill-reputed company, giving false information on the application form, etc. The best thing is, all these rejection criteria can be rectified with a few simple measures. 

How can I avoid my Personal Loan Application from getting rejected? 

  1. Check your credit score (CIBIL™ score or from other bureaus)  regularly to get an idea of your credit standing. Take steps to improve your credit score. You can do that by paying all your EMIs and credit card bills on time. You can also close any loans when you come across any surplus money. If you find any error or incorrect entry in your credit report, you can get it rectified through the credit bureau. 
  2. Take steps to improve your ‘Income to Debt Ratio’. Close down any long term loans that are eating into your monthly cash flow. If you have any surplus money parked somewhere, utilize it to close down such loans. When you have lesser liability, you are eligible for better personal loans
  3. Submit all the relevant documents asked by the lender. Procure a list of the required documents and get them ready before you submit the application. It is important for a quicker loan process. Ensure that all your documents are genuine. 
  4. Add a co-applicant who is also earning. Their income, when added to the application, translates into a better repayment capacity for the lender. The rejection instances are reduced and may also get you a higher loan amount. 
  5. Avoid frequent job changes; Frequent job changes don’t bode well for your creditworthiness. Though you may have genuine reasons for your job change, the lender may see this in a different light while processing your loan application. 

Bottom-line

It is shrewd to learn all the eligibility criteria beforehand and be prepared rather than submitting a half-baked application form only to be rejected. Remember that a personal loan rejection has a severe impact on your credit score. You must know by now that it is very easy to improve your credit score and make yourself eligible for a personal loan. It helps to spend some time researching different lenders and different personal loan products to find the one that suits you and your needs. 

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