Personal Loan

Factors You Need to Know that Lead to Personal Loan Rejection


Most banks approve a personal loan and disburse the funds within a few hours. But people sometimes face rejection due to one or more reasons. And when it happens, they feel stressed, angry, or disappointed, no matter what the reason is.

But if you know about the factors that lead to loan application disapproval, you can avoid them. If you take care of them, you will get instant and assured approval. So to help you with it, we have discussed some reasons for loan application rejection in this article. And we hope they will help prepare for a loan request in the future. Read on.

Factor 1: Unstable job or frequent job switches

People applying for a personal loan (or any type of unsecured loan) should have a stable source of income. 

Income stability indicates that the person can repay the loan on time and works as an assurance to the lenders. Hence, if you have been employed for two years or more, that is a good indicator of your financial stability to the lender. 

In that case, you will have a greater chance of having your loan application accepted. But, those who more often switch jobs find it difficult to get approval. And if you have not been employed for a long time (say, less than a year), lenders are more likely to reject your loan request.

Factor 2: Low credit score

A credit score is a crucial factor that helps lenders decide if they will lend you money. It is a three-digit number representing your credit history. Also known as the CIBIL score in India, it plays a significant role in your ability to get a personal loan. While a score of 650+ out of 900 is good, having 750+ is excellent.

If you always repay your debts on time without missing any EMIs, you will have a high credit score. As a result, lenders will approve your loan application. You can also negotiate a lower interest rate based on your strong credibility. 

But a lower credit score can be a big hurdle. Your loan request may get disapproved, regardless of your financial stability. Hence, you should check and maintain a good CIBIL score regularly.

Factor 3: High debt-to-income ratio

People often ignore this element: a high debt-to-income ratio can harm your ability to get a loan. If your monthly EMIs take up a significant part of your income, it can be a red flag for the bank. It can hinder your chances of approval, regardless of what type of loan you are applying for. When you are requesting a personal loan, lenders will see the high ratio as a problem.

Hence, those seeking a loan should ensure that their debt-to-income ratio is low. Clearing or reducing existing debts before starting the personal loan process will help.

Factor 4: Low income may lead to personal loan rejection

Like an unstable job, your low income can become one of the reasons for personal loan rejection. Most lenders check if the applicant earns a monthly salary or profit of Rs. 25,000. And applicants earning below this amount may not be eligible. Yet, people with no previous debt record may still get a personal loan. A good credit score and no existing debt can help even if you have a low income.

Factor 5: High credit utilisation

The credit utilisation ratio (CUR) is one of the aspects most lenders check before approving your loan application. It helps them determine the financial stability of loan applicants. Frequent use of credit means the person has an unstable income and often borrows money. 

But a low ratio means you seldom use available credit and have a stable income. The ideal percentage is 30% or less. And if you avoid using credit too often, you have better chances of getting a personal loan approved. So, maintain this ratio at an acceptable percentage before applying for a loan.

Factor 6: Inaccurate or incorrect information in the application

Inserting incorrect information in a loan application is a common mistake people make and it results in personal loan rejection. The instructional document may not always include this caution. Hence, applicants often ignore its importance and they end up filling in false or inaccurate details on the loan application form.

Lenders expect you to provide recent and most accurate personal and financial information such as correct spelling of the name, correct PAN and Aadhar number, and DoB, among others. Please note that lenders verify everything about you with the help of an agency. 

They also inspect all the documents you provide to support your loan request. So there is no room for misinterpretation of the requirements or the questions asked in the form. Even a single mistake in the application form may lead to a personal loan rejection.

Factor 7: Unpaid debt may cause personal loan rejection

People often ignore this crucial aspect while proceeding with a personal loan application. From the bank’s point of view, an applicant’s loan eligibility depends on their ability to repay, which is visible in their present unpaid debt record (fetched during a hard enquiry into an individual’s credit score). 

So, to avoid rejection of your loan request, you should clear or lower your existing debt. Note that it is easy for the lender to know if you have taken a loan from a third party. They can also find out if you have failed to pay any EMI. Hence you need to settle all debts or at least keep them minimal before applying for a personal loan.

Factor 8: Other reasons

The reasons above are some of the most common reasons all loan applicants should know. Yet, several other reasons may lead to personal loan rejection even if everything is good. 

They include your age, health, education, and nationality. Banks and NBFCs also consider these factors before processing your loan application.

Reaching retirement age and not being able to get an income or pension may become a reason for rejection. 

Suffering from a health problem that can make you jobless may cause a problem. Further, a foreign nationality may raise trust issues. Thus, any of these reasons may prompt the lender to disapprove your loan application.

In a Nutshell

Procuring a personal loan from a bank or private lender takes only a few hours to a few days. The only thing you have to be sure of is meeting their requirements. Take care of the factors discussed in this article and repay the debts on time. 

That is all you need to be eligible for faster loan application approval. Ensuring you meet all eligibility criteria can also give you an advantage. And you can negotiate the repayment period and interest rate. We hope this article will help you avoid factors that cause personal loan rejection. For more information on personal loans, business loans, home loans, etc., and topics related to financing, visit Piramal Finance — your one-stop destination for all matters finance.