Lenders usually assess the credit scores of their applicants as an initial check of their creditworthiness.
Personal loans are popular for their quick disbursal, making them ideal for managing unexpected expenses, consolidating debt or funding essential financial goals. When applying for a personal loan, understanding the factors that can lead to rejection is vital for improving your chances of approval. Banks and Non-Banking Financial Companies (NBFCs) assess various eligibility criteria during the evaluation process and failing to meet these criteria can result in the rejection of your personal loan applications. Here are the five main reasons why personal loan applications are commonly rejected:
Lower Credit Scores
Lenders usually assess the credit scores of their applicants as an initial check of their creditworthiness. Lenders usually favor approving loan applications from individuals with credit scores of 700 or higher. Those with lower credit scores are often viewed as less financially disciplined and thereby, have higher chances of loan defaults. As a result, applicants with lower credit scores are more likely to face rejection of their personal loan application. While some lenders do approve loans for individuals with lower credit scores, such individuals are often charged higher interest rates to offset the higher credit risk.
The need for personal loans can arise unexpectedly, so individuals should aim to maintain credit scores of 700 or higher to improve their loan eligibility. Improving credit scores through healthy credit practices, such as repaying credit card bills and EMIs on time and avoiding multiple loan or credit card applications within short periods. For those who have never used a loan or credit card, obtaining a credit card can help build a credit score. As transactions made with credit cards are reported to the credit bureaus, using a credit card for purchases and repaying the balance by their due dates can steadily improve credit scores. Individuals unable to secure a regular credit card may consider availing secured credit cards to build their credit scores.
Individuals should fetch their credit reports from the credit bureaus to identify errors, if any. Alternatively, they can visit online financial marketplaces to access their credit reports. If any inaccuracies or signs of fraudulent activity are found, it’s important to report these to the relevant lender and the credit bureau(s) for correction. Rectifying errors in credit reports can lead to improved credit scores, thereby increasing the chances of availing personal loans at lower interest rates.
Lower EMI Affordability
Personal loan lenders also assess applicant’s loan repayment capacity when determining their loan eligibility. Lenders usually prefer to approve applications whose total monthly loan repayment obligations, including that of their proposed personal loan EMI, fall within 50-55% of their net monthly income. Those exceeding this threshold can improve their eligibility by choosing longer tenures or lower loan amounts, which can reduce the EMI and bring the monthly repayment obligation within the desired limit. Applicants can use personal loan EMI calculators available on lenders' websites or use platforms like Paisabazaar and other online financial marketplaces, to determine the optimal EMI and repayment tenure for their personal loans.
Unstable Employment History
Lenders assess employment stability when evaluating personal loan applications. Applicants who frequently change jobs are often considered to carry higher credit risks for personal loan lenders, which can lower their chances of approval. Additionally, some lenders require salaried applicants to have at least 6 months to 1 year of service with their current employer. Therefore, individuals planning to apply for personal loans in the near future should avoid frequent job changes to increase their chances of loan application approval.
Approaching Multiple Lenders within Short Duration
When applying for personal loans, lenders will obtain your credit report from the credit bureaus to evaluate your creditworthiness. Each such fetch, known as hard inquiry, can reduce your credit score by a few points. Consequently, making multiple hard inquiries within a short period can significantly impact your credit score and reduce your chances of availing personal loan. To mitigate this risk, applicants should use online financial marketplaces to compare personal loan offers from various lenders before submitting their final applications. Requests made through these platforms are considered as soft inquiries and do not negatively affect your credit score.
Ineligible Occupation Profile
Banks and NBFCs also take your occupation into account during the personal loan evaluation process. Lenders may deny applications from individuals whose employer or occupation is not on their list of preferred profiles. Additionally, if you work for an organization not included in their list of approved employers, your personal loan application could be rejected. For self-employed applicants, lenders may also decline applications from those whose businesses or professions fall within their negative list.
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