When you need funds urgently, you apply for personal loans. It could be used to pay for a wedding, a trip, higher education, or to repay debt. But not all personal loan applications are accepted. Rejection of personal loans is more common than you think.
Here is a guide to help you understand the reasons for the rejection of personal loans. We will list the reasons for rejection and how to avoid it.
Applying for a personal loan is easy. You need a few documents. As soon as the verification is completed, the loan amount is deposited in your account. It is a simple process. However, many applications are rejected. Why do you think it happens?
Let’s take a look.
What Are the Reasons for Personal Loan Rejection?
Here are some points you must keep in mind before you apply for a personal loan to keep it from getting rejected.
- Low Credit Score: Your credit score shows that you can be trusted with credit. It shows the lenders that you are capable of repaying that loan. If you have a low credit score, the chances of a personal loan rejection are higher.
- Low or Unsteady Income: Irregular or low income is another factor for loan rejection. When you apply for personal loans, your income determines your eligibility. If you don’t have a regular or sizeable income, your chances of defaulting are higher. You will not have the ability to repay the loan. So, your personal loan application is rejected if your income does not meet the criteria.
- Unstable Employment: Switching jobs often affects personal loan applications negatively. So does working for an unlisted or unregistered company. The lenders will reject your loan application if you quit jobs often or keep moving from one job to another. It shows your unreliability. Those with unsteady jobs, like freelancers, often face difficulty getting loans.
- High Debt or a few Enquiries/Applications for Loans: If you have already taken a few loans or have made multiple inquiries, it will negatively affect your loan application. Banks refute those who take out numerous loans. It shows they have huge debts they can’t manage. It’s likely they will default. If you have multiple loans, this can be another reason for the rejection of a personal loan. Also, if you keep making inquiries about loans, your credit score gets negatively affected.
- Incomplete or Incorrect Forms: Many times, individuals make errors while filling out forms. If there are discrepancies on the personal loan application, it will be difficult for banks to verify the information. Hence, they will reject your loan application.
- Falling Short of Eligibility Criteria: Sometimes, the borrowers don’t meet the eligibility criteria for the loan, which leads to the rejection of personal loans.
Now that we know the reasons for the rejection of personal loans, let’s take a look at how you can overcome this problem.
Ways to Prevent Personal Loan Rejection
Yes, there are measures you can take to make sure your application doesn’t get rejected. Here are a few things to do beforehand.
- Do not take out multiple loans. Also, don’t keep enquiring about loans constantly. Borrowing more money from different lenders will only increase the chances of rejection. It will also give the impression that your financial health is terrible.
- Do not default on repayments. Make timely payments. When banks see your repayment history, they want to know if you’re reliable or not. Regular repayment is a good indicator that they can count on you for timely EMI payments. It will prevent the rejection of your personal loan application.
- If your credit utilization is low—under 30%—the chances of getting your personal loans approved are high.
- Maintain a good CIBIL score. A score between 750 and 900 is considered ideal.
- Fill out personal loan applications carefully and avoid mistakes. You don’t want your personal loan application rejected only because of a misspelling. Also, make sure you submit all required documents.
- Avoid switching jobs frequently and show a stable income.
- Research the lender you are about to approach about their eligibility criteria. Make sure you fit their loan criteria before submitting your application.
Maintaining Your CIBIL Score
CIBIL score plays a vital role in the loan process. If your CIBIL score is not high, chances are your loan application will be rejected. What can you do in that case?
- Apply for personal loans with another family member who has a high income and CIBIL score.
- Pay off your debts promptly. It will improve your credit score over a few months.
- If you are a freelancer, show multiple sources of income. Strengthen your case by showing quarterly sales or salary slips, contracts, etc. Showing income from other sources is proof that you can repay loans and improve your eligibility.
- If you switch jobs frequently, apply for a loan after you have successfully held a job for a few months. Lenders like to know you have a stable income source. It shows you can repay your debts.
- Go for lenders with simple eligibility criteria for personal loans, like low credit score requirements, and flexible repayment methods.
There could be many reasons for your personal loans getting rejected. But you can avoid it by keeping the above-mentioned factors in mind. Meet the lenders and understand their eligibility criteria. Ask them what they look for in a loan application to approve it. If nothing works, collateral might help you get a personal loan. Lenders prefer secured loans as they guarantee recovery of their loan amount.
To learn more about why personal loans get rejected, personal loan applications are rejected and how one can strengthen them, visit the Piramal Finance website.