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Common Reasons for Personal Loan Rejection

Published On May/19/2024

Applying for a personal loan can be straightforward if you meet the eligibility criteria and provide all necessary documentation. However, receiving a rejection notice after submitting your application can be disheartening. Understanding the common reasons for personal loan rejection in India can help you prepare better for future applications and improve your chances of approval. Let's study the key factors lenders consider when evaluating personal loan applications.

1. Applying With a Low Credit Score

A credit score reflects your creditworthiness based on your credit history. Lenders use this score to assess the risk of lending to you. Suppose your credit score is low (typically below 650). In that case, it indicates to lenders that you may have a history of late payments, defaults, or high credit utilisation. That increases the risk for the lender, leading to a higher likelihood of rejection or approval with unfavourable terms.

Must Read: How to get urgent Personal Loans for Bad Credit score?

2. Submitting Incomplete Documents

When applying for a Personal Loan, lenders require specific documents such as identity proof, address proof, income proof, and bank statements. Incomplete submissions or missing documents can delay approval or lead to outright rejection. It's crucial to double-check the required documents and ensure all information is accurate and up-to-date.

Also Read: Applying for a Personal Loan online? Here's a step-by step guide

3. Not Having a Steady Source of Income

A steady and verifiable source of income is essential for lenders to gauge your repayment capability. Lenders may reject your loan application if you are unemployed, have irregular income, or cannot provide adequate proof of income (like salary slips, income tax returns, or bank statements). A stable employment history and sufficient income to cover the loan repayments is crucial for loan approval.

4. Not matching other eligibility criteria

Lenders have specific eligibility criteria besides income and credit score, such as minimum age, maximum age at loan maturity, employment status, and sometimes even location-specific requirements. Failing to meet any of these criteria can lead to rejection. For instance, your application may be declined if you do not meet the minimum age requirement (usually 21 years).

5. Multiple Pending Loans

Having multiple existing loans or high debt obligations can adversely impact your loan application. Lenders assess your debt-to-income ratio to determine if you can afford additional debt. Suppose you already have several outstanding loans or credit card debts. In that case, it suggests higher financial strain and reduces your ability to manage more debt responsibly. Lenders may reject your loan application to mitigate the risk of over-indebtedness.

Steps to Improve Your Loan Approval Chances

Check Your Credit Score Regularly

Monitor your credit score and address any discrepancies or issues promptly.

Improve Your Creditworthiness

Pay bills on time, reduce credit card balances, and maintain a healthy credit mix.

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Enhance Income Stability

If possible, stabilise your income through steady employment or supplementary sources.

Review and Correct Documentation

Double-check all documentation before submission to ensure accuracy and completeness.

Reduce Existing Debt

Lower your DTI ratio by paying down existing debts before applying for a new loan.

Conclusion

Understanding these common reasons for personal loan rejection in India can empower you to take proactive steps to strengthen your financial profile. Addressing these factors can increase your chances of securing approval for future loan applications and achieving your financial goals effectively. Remember, each lender has specific criteria, so it may be beneficial to research and apply with lenders whose requirements align with your financial situation.

To improve your chances of Personal Loan approval, it's advisable to maintain a good credit score, ensure all required documents are complete and accurate, demonstrate a steady income source, meet all eligibility criteria, and manage existing debts responsibly.