Reasons Why Your Personal Loan Application May Get Rejected

A personal loan is an unsecured loan taken by borrowers from banks or a non-banking financial company (NBFC). In recent years, availing a personal loan has become more accessible and convenient, thanks to online banking and fintech innovations. According to FY18 RBI data, personal loans accounted for 96% of new bank loans in 2017-18. While digitization has made the application process simpler and easier, loans are still granted on the basis of various criteria like credit and employment history, income level, repayment capacity, documents etc.

Thus, many times the personal loan application is rejected by the bank or the NBFC. Awareness on approval criteria and reasons for rejection can help your chances of availing the loan. Here are a few common reasons why loan applications get rejected:

1. Poor credit score

Banks and mainstream lenders typically check an applicant’s credit score to verify his/her creditworthiness. In India, it is usually the CIBIL score – a three-digit numerical summary of an individual’s credit history. CIBIL is a reputed credit bureau that collects and records credit information, allowing lenders to assess and approve loans.

After you apply for a personal loan, one of the first things the lender will do is to check your credit score. Generally, a CIBIL score above 700 is considered healthy and increases your eligibility. Lower credit scores might be cause for loan rejection.

2.   Income/Employment status

Lenders evaluate your current income status to avoid defaults. So, those without a steady income or currently unemployed, might be precluded on the assumption that they can’t repay the loan on time.

Most lenders specify the minimum income required for loan eligibility. So, an income lower than the bar they have set, is also a cause for rejection.

Job stability is another factor. If you switch jobs frequently or can’t show a steady income owing to a freelance career, it might be grounds for rejection.

In the absence of a job, make sure you can prove other income sources on paper. These could be interest pay-outs or rental income.

3. Incomplete documentation

Relevant documents are required to prove your eligibility for personal loans. Failure to submit all the documents, and incomplete or incorrect details are some reasons why loan applications are rejected. Follow the guidelines provided by your lender and submit appropriate documents to ensure your loan comes through. All the major banks and lenders now offer this information on their websites often with the ability to submit your application online.

4. Outstanding debt

Many borrowers have one or more outstanding loans that put a strain on their current income due to ongoing credit payments. Debt to income (DTI) ratio is the measure of how much you can afford to borrow. A high DTI ratio may impact your eligibility and often loans are declined if the lender doubts your ability to fulfil all credit payments on time.

5. Previously rejected applications

If your loan application was declined in the past, this may impact your ability to avail a loan again. Each loan rejection is recorded in your CIBIL summary and may have an adverse impact when you re-apply for a loan.

If your credit report shows too many loan applications in a short term, then it leads to an unfavourable assessment of your profile and you might be considered a risky candidate.

6. Blacklisted residential address

If anyone in your household has missed paying EMIs or has defaulted on credit card/loan payments previously, your address shows up in the defaulters list on CIBIL records. This can be a cause for not approving your application as it shows lack of credit-worthiness.

If you have shortlisted the lending institutions that you are applying to, then you can visit their website to find the eligibility criteria and prepare accordingly. Many websites offer a loan eligibility calculator, where you can key in the details and to find out your eligibility. Using these details, the application/tool offers a quotation of the loan you are suitable for or whether you meet their requirement. To get an estimate of your repayment schedule and ability, you can also use tools such as Loan EMI calculator.

Fortunately, there are many alternative debt financing options, such as peer-to-peer (P2P) lending available now for many who don’t meet the bank’s criteria. These platforms use a wider set of parameters to judge a borrower’s eligibility and offer loans to those deemed fit. This is a useful space for first-time borrowers, or borrowers with short credit history and other worthy but under-served customers.