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    5 Common Reasons Why Personal Loan Applications Get Rejected

    Money can solve most problems in life, but sometimes an individual needs more money than they currently have. They opt for personal loans to borrow the necessary funds from financial institutions. Among all other loan options, personal loans are easiest to obtain for short-term goals like marriage, travel, medical emergencies, home renovation, education, etc. Many need support regarding the personal loan application process.

    Rejection in any field never feels good. However, people need to face it at different times. Multiple credible reasons could drive prospective financial institutions to reject loan applications. Understanding the most common reasons for rejection can help you stay better prepared to avoid it. Let’s look at some common reasons that might result in a personal loan rejection.

    • No or Low Credit Score

    The credit score is a 3-digit value each individual’s credit profile gets based on their credit-related behaviour. The score may range from 300 to 900, with 300 being the lowest and 900 at the top. Most lending institutions check this numerical figure to determine an applicant’s creditworthiness before sanctioning their loan application.

    Most reputable NBFCs require a credit score of 630 or above to consider evaluating a loan application. Some finance companies may accept applications from lower-scored individuals, but their interest rates are higher, loan sanction is smaller, and tenure is shorter than normal. Applicants with a record of missed payments and defaults often get their applications rejected. Having a score or credit history may also lead to personal loan rejection, as the lending institution needs to assess the applicant’s financial habits.

    Some effective steps to improve the credit score include paying all credit card bills and loan EMIs consistently, diversifying the credit profile with different loan types, reducing the debt-to-income (DTI) ratio, retaining old accounts, etc.

    • Multiple Loan Applications and Enquiries

    When an individual needs a personal loan urgently, it drives them to make several loan applications and enquiries with multiple lending institutions. Every loan application results in the lending institution making a hard enquiry on the credit report, leading to a dip in the credit score by a few points with each application. However, we advise against repeating such queries as it negatively impacts the credit score.

    Credit bureaus like Experian consider these enquiries and mention them in the credit report. Such behaviour projects the applicant as a credit-hungry borrower, and the lending company may question their financial credibility. That, in turn, leads to reduced personal loan eligibility and rejection of the loan application.

    • Too Many Financial Obligations

    Existing loans and financial obligations that consume the maximum portion of an applicant’s monthly income may be the reason for an applicant’s loan rejection. Before approving a loan request, lending institutions examine the applicant’s ongoing EMIs, credit card dues, and debt-to-income ratio. Applicants already heavily indebted are at a higher risk of defaulting when they again apply for a new loan.

    If the lending institution gets an idea that the applicant may not repay the loan due to their current commitments, they are most likely to reject their personal loan application. So, keeping the existing debt at a bare minimum and maintaining a DTI ratio of 30-40% or less is best to ensure loan approval without hassle. An eligibility calculator gives an estimate of the loan amount one may get based on parameters like monthly income and current obligations. Those who need a larger amount may consider co-applying with a family member with a stable income and a good credit score.

    • Not Fulfilling the Eligibility Criteria and Documentation Requirements

    Every NBFC outlines the personal loan eligibility criteria with income as the primary component to approve a funding request. The applicants must meet these thresholds to qualify for a personal loan from a lending institution with favourable terms and conditions. Failure to fulfil the lending institution’s eligibility conditions will lead to loan rejection. However, simply meeting the eligibility criteria will not ensure approval of the loan request. Entering incorrect details in the application form, not submitting the required documents, or not providing verifiable documents might also result in personal loan rejection from the financial institution.

    • Unstable Employment History

    A personal loan approval largely depends on the applicant’s employment history. Those who change jobs too frequently or show inconsistent employment over a long period will lead to the rejection of their loan request. Lending institutions mostly reject applications from cash salary applicants and those working for unregistered companies.

    Loan providers seek stability in the applicant’s employment history to minimize the default risk. Hence, salaried professionals with less than enough work experience in the current organization may have their loan application rejected.

    Other Reasons

    Below are a few other reasons why lending institutions may reject a personal loan application:

    • Lack of proper documents like address, income, identity, or employment proof.
    • The lending institution is not providing services at the applicant’s location.
    • The applicant is younger or older than the NBFC’s minimum or maximum age criteria.
    • Salaried professionals must check and fulfil the NBFC’s minimum salary requirement. They will get their application rejected if the salary exceeds the minimum threshold.
    • Absence of credit history with no credit cards and loans.
    • A high credit utilisation ratio indicates an applicant’s dependence on credit.

    Rejection of the personal loan application adds to an individual’s financial woes. Those who have faced multiple rejections must consider the common reasons and take appropriate action to improve eligibility for future applications. Aspiring borrowers must take corrective steps to improve their financial profile and raise their credit scores to make future applications attractive to lending institutions. Once the loan gets approved, use an EMI calculator to select a loan term with budget-friendly EMIs and repay on time to build credibility over time.

    Read More: Must Follow Rules When Taking a Personal Loan Online

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    Josie Patra
    Josie Patra is a veteran writer with 21 years of experience. She comes with multiple degrees in literature, computer applications, multimedia design, and management. She delves into a plethora of niches and offers expert guidance on finances, stock market, budgeting, marketing strategies, and such other domains. Josie has also authored books on management, productivity, and digital marketing strategies.

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