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6 Common Reasons For The Rejection Of A Personal Loan

20^th Jan 2025...

Personal Loans are important resources as they offer the required capital in financial emergencies. Nevertheless, loan declines can profoundly affect financial planning and increase stress during crucial times. An applicant aware of typical causes for rejection will be better prepared and increase his chances of approval.

This blog identifies 6 Personal Loan rejection reasons, providing insights and advice to avoid these mistakes.

1. Low credit score

A credit score numerically represents someone’s creditworthiness, usually between 300 and 900. Lending institutions consider this one of the main factors when approving Personal Loans. A high credit score shows responsible money habits and reduces the chances of default, making lending institutions more accepting of credit.

Approximately 750 banks and other lending institutions have set a minimum credit score requirement for Personal Loan approval. If one gets a score lower than this, then their application will not be accepted. Moreover, having no record of borrowing money also reduces the possibility of the request going through.

These are some ways through which individuals can maintain good credit scores:

Paying all bills and loan instalments on time
Reducing balances on cards in use
Avoiding multiple applications for loans and any queries about your credits
Checking your reports from time to time, considering they may be incorrect

Practising these tips will enable people to raise their credit ratings, thus increasing the chances of acquiring a person’s loan.

Also Read: Decoding FOIR: Impact On Personal Loan Approval

2. Multiple loan applications and enquiries

Try not to apply for several loans simultaneously; this can hurt your credit report. Each application triggers a hard inquiry, which will be recorded in your credit report. Once credit bureaus notice many such inquiries within a short span, it shows lending institutions you are probably in distress with finances, hence trying to get other forms of financing because of possible liquidity challenges.

The effects of these myriad questions can lower your credit score, making you look more dangerous as a borrower to potential creditors. Therefore, lending institutions may decline your loan request, fearing you cannot manage additional loans. This suggests borrowing one Personal Loan at a time from one lending institution can help maintain your credit score and increase the chances of being granted the loan by showing financial stability and controlled borrowing behaviour.

3. High amount of existing debts

High existing debts can interfere with the approval process for an entirely new Personal Loan. Lending institutions evaluate borrowers’ debt-to-income ratio, indicating what part of their monthly income is used for debt payments. A high ratio means you are already too burdened due to debts; thus, they hesitate to offer extra credits.

Lending institutions treat high debt as a danger sign, implying increased liability management difficulties for any additional financial needs an individual might have had. When the majority of your earnings go towards settling past loans, financiers assume you have limited ability to pay off fresh advances, turning down requests.

For better chances of getting approved for loans, make sure you borrow within what you can comfortably pay back without straining yourself economically. Keep total monthly obligations from all debts reasonable compared to income levels. This will boost your credibility and keep a check on financial soundness, thus reducing any possibility of being over-indebted.

Also Read: How to Get Personal Loan for CIBIL Defaulters?

4. Not meeting the income criteria

When it comes to Personal Loans, your income is a big determinant of whether you qualify for one or not. The lending institutions evaluate your Personal Loan Eligibility Criteria to ascertain you have a stable and reliable income stream that will enable you to service your monthly EMI bills. A regular flow of money is an indicator of financial security. Therefore, borrowers will comfortably offer their loans if they are sure you would repay EMIs on time.

Applicants must earn a minimum income. If your income does not surpass this mark, forget about it for good. This should be noted because various lending institutions have their thresholds.

Discussing your financial situation with the lending institution before applying may prevent rejection based on income criteria. This can help identify potential issues and provide the opportunity to present additional information. You can also explore alternative loan products that may be better suited to your financial profile.

Also Read: Understanding The Impact Of GST Rate On Personal Loans: A Comprehensive Guide

5. An unstable employment history

A consistent employment record is essential when seeking Personal Loans. This shows stability at work while providing a continuous source of revenue preferred by borrowers. Such employers help strengthen applications since credibility increases the chances of obtaining credit from these sources.

Applicants who change jobs frequently or have employment gaps raise concerns among lending institutions. Three years of continuous employment is typically a minimum requirement for most banks and lending institutions. Reliability and consistency matter most when one wants their loan application approved.

Focus on building a solid employment history to improve your chances of loan approval. Ensure that your work experience is verifiable and with reputable organisations. Continuous employment raises more than one’s eligibility level; it also improves the overall structure of an individual’s finances, making him/her more desirable to creditors.

6. Missing or incorrect documents

Getting a Personal loan approved involves verifying all Personal Loan required docs. To assess your suitability, lending institutions depend on accurate and complete records regarding you. These include personal documents, financial statements, and employment records. Failure to provide or produce the wrong copies may result in instant annulment of the loan application.

Inaccurate information about a person and incomplete papers, such as missing ID proof, address cards, salary slips, and employer details, make banks suspect someone has lied while applying for credit. Such mistakes can render one unqualified if they do not rectify them quickly.

To avoid getting your Personal Loan rejected, ensure all documents are accurate and complete. Double-check for any inconsistencies and provide all required information. Completeness and accuracy of documentation will ease the approval process and prove you can be relied upon.

Wrapping Up

Knowing the most common grounds for having a Personal Loan declined will increase your chances of success. You should address the following issues: maintaining a healthy credit score, not applying for multiple loans at once, repaying existing debts properly, meeting income criteria set by lending institutions, maintaining a steady employment history, and presenting the correct documentation.