Reasons For Personal Loan Rejection

Applying for a personal loan can be a tough and slow process. This is especially true when you really need money. A personal loan can help cover unexpected expenses, fund a big purchase, or consolidate debt. It offers great flexibility and support to the borrower. Major banks in India are happy to help customers with loans. They offer both small and large loans. However, sometimes personal loan applications are rejected. This situation can be due to low credit scores, low bank balances or non-payment of charges in the past.

Quick View : Reasons for Personal Loan Rejection & Fixes

Let’s learn more about common reasons for personal loan application rejection and how to avoid these pitfalls while enhancing your personal loan eligibility. Understanding these causes can help you increase your chances of getting the loan approved quickly and make better financial decisions.

Top Reasons Why Personal Loan Applications Get Rejected & How to Avoid Them?

Here are some reasons why banks may reject your personal loan application. We will also discuss how to improve your chances of getting the funds.

Low Credit Score

A credit score is a three-digit number, often between 300 and 900, that reflects your creditworthiness and history of outstanding payments. A low credit score hints that the borrower won’t be able to pay the loan interest payments on time and might even flee with the payment. Banks often reject these personal loan applications to escape potential losses and even flag the customer for future loans.

What You Can Do:

Monitor your credit score at all times and improve it by making payments on time. Manage your credit responsibly and pay outstanding debts promptly. 

High Debt, Less Income

Banks often request all customers’ financial statements to check their actual income and outstanding debts, along with EMIs and other monthly payments. If the bank feels that the customer already has high debt and a low-income ratio, it won’t approve the personal loan application. This measure is for the bank’s safety, as the borrower might be unable to handle additional debt. 

Improve Your Chances By:

Customers can pay off their existing debts before re-applying for a personal loan. They can also talk to credit card companies to reduce their monthly interest payments and increase home loan timelines, significantly lowering the monthly EMIs. 

Shortage of Monthly Income 

Many banks only offer personal loans to people who earn more than a minimum amount of people employed in a certain industry (salaried employees or business owners). Your personal loan application might get rejected if the bank feels you don’t meet their criteria or yearly income requirements.

Recommended Step:

Assess your income before applying for a loan at a particular bank. After researching that they allot loans to people with your employment history and salary, you can look for ways to increase your income sources, improving your chances of getting personal loans. 

Inconsistent Work Record

Banks don’t allow loans to people with inconsistent work histories, implying that the borrower can’t follow a consistent repayment schedule. This scenario includes factors like frequent job changes, irregular income and long periods of employment. For business owners, this can equal unstable business practices and constantly changing products and services. 

Lender-Friendly Practice:

Showcase stability in your financial records by highlighting a regular and fixed-income structure. Keep copies of all your income statements via jobs, and try to hold on to a single employment source. 

Limited Credit History

The bank scrutinises accounts with no CIBIL score and a limited credit history. This statement means that the borrower needs more credit records or has recently opened their credit accounts with multiple banks, not properly indicating the credit report. Banks often ask these borrowers for more information about their income and debt sources, leading to more chances of rejection of personal loan applications.

Smart Tip:

Build a positive credit history with a single bank over a couple of months, which might improve your financial standing. Pay your bills on time, as this might reduce your new credit score and help you acquire personal loans at lower interest rates. 

Errors In Loan Application Form or Inconsistent Information

Some borrowers need more accurate/ complete information on their loan applications, which can result in immediate rejection. Any type of incorrect information, intentional or unintentional, can raise serious doubts about your credibility and might even lead to questioning all of your accounts. 

Quick Fix:

Maintain a single file for your credit reports and double-check for silly errors in the form. Don’t submit any fraudulent documents, and enter as many details as possible to prevent any chances of being flagged. 

Multiple Loan Applications

If a customer engages in loan stacking, which is applying for multiple loans quickly, their personal loan applications will be rejected. Multiple applications might give the impression that you are trying to pay off numerous pre-existing debts and cannot cover the interest payments for your loans. This scenario also implies that you might ask for loan payment extensions and will take upon more debt to pay off this new personal loan.

What You Can Do:

Only apply for loans you think will get approved, and restrict yourself from applying for multiple loans within a short period. If you have already applied for a loan, see the timeline for returning the applications after submitting them. 

Mismatch in Type of Loan Application

Applying for the wrong loan type is another reason for the rejection of your personal loan application. This can be traced back to a lack of proper understanding when it comes to types of loans in India. Each loan in India is specifically created to meet certain requirements. For example, home loans for property purchases, car loans for vehicles, and personal loans for miscellaneous expenses. When you apply for a personal loan but mention a purpose that aligns with another loan type, such as purchasing a car or funding a home renovation, lenders may question the legitimacy of your application. They evaluate your request against the purpose stated, and any mismatch can raise red flags, leading to outright rejection. Additionally, some loan types come with varying eligibility criteria, and misunderstanding these can further complicate the process. 

Recommended Step:

Always align your financial needs with the appropriate loan product to avoid rejection. Research the lender’s offerings thoroughly and ensure that your purpose fits within the scope of the loan you are applying for. Clearly state your loan’s purpose in the application and provide accurate supporting documents.

Insufficient Collateral

Personal loans usually don’t require high collateral value. Still, if the bank feels that the collateral’s market value is not similar to or higher than the loan amount, they can reject the loan. They might reject the personal loan application if they find something inappropriate with the collateral or can even reject the security due to decreasing market value.

Improve Your Chances By:

You should analyse the market value of your collateral before taking on a loan or consider financial options that require less guarantee. 

High-Risk Factors Over Co-applicants and Guarantor

Banks don’t offer personal loans to people who don’t share personal information and have a history of non-payment of interest on loans. They might reject the loan after seeing the guarantor’s finances and noticing the applicant’s low credibility. All of these are high-risk factors that might impact loan repayment. 

Smart Tip:

Ensure that your co-applicant or guarantor has a good credibility score and does not have any existing long-term debts.  Check their financial statements yourself before applying with the bank.

No Savings

Banks prefer clients with a savings account who have maintained a minimum balance over a couple of years that the individuals use in emergencies. This amount is not the official collateral for the personal loan but still stands as a guarantee in case of non-payment of interest. However, some banks still offer personal loans to such borrowers under special conditions. 

How to Avoid This:

Maintain a separate savings account at all times, as it helps in emergencies and can help build a good credit rapport to prevent any personal loan application rejection.

Multiple Existing Loans

Your loan repayment ability depends on the number of EMIs and interest payments. If you have many monthly obligations, you are at risk for non-payment of interest; hence, banks will only accept your loan. Each bank has set criteria for the FOIR they allow per person before rejecting an application. 

What You Can Do:

If you increase the EMI payment timeline, you can automatically reduce your monthly debt payments, and banks might approve your loan. 

Winding Up

Personal loan application rejection can be discouraging, but citizens can easily reapply after making the required changes. Banks usually try to approve all suitable applications and help you make better financial decisions to ensure you have enough savings for emergencies. By understanding the common reasons for rejection, you can quickly address those and turn that “no” into a “yes”. 

Frequently Asked Questions (FAQs)