5 Reasons Why Your Personal Loan Application Can Get Rejected

Banks and non-banking financial companies (NBFCs) consider several factors when evaluating personal loan applications. Lenders reject personal loan applicants of those who fail to meet their eligibility criteria. Therefore, understanding the common causes of personal loan rejection may help improve your chances of availing personal loans. Here are the five common reasons for personal loan rejection:

Lower EMI Affordability

Personal loan lenders consider their applicants’ repayment capacity while evaluating their loan eligibility. They usually prefer granting loan approval to applicants having their monthly repayment obligations, including their proposed personal loan EMI, within 50-55% of their net monthly income. Personal loan applicants exceeding the limit can improve their loan eligibility by selecting longer tenures and/or opting for lower loan amounts. Doing so will help to reduce their proposed personal loan’s EMI and, thereby, reduce their total monthly loan obligations within the 50-55% limit. Personal loan applicants can use the online personal loan EMI calculators provided by banks and NBFCs on their websites to know their optimum EMI and tenure for their proposed personal loans based on their repayment capacity. Alternatively, they can also use Paisabazaar’s personal loan EMI calculator or those of other online financial marketplaces. 

Changing Jobs Frequently

Personal loan lenders consider their prospective borrowers’ employment stability while evaluating their loan applications. Those who switch jobs frequently are considered as carrying higher credit risk for the lenders and thus, are less likely to receive personal loan approval.

Furthermore, some personal loan lenders also require their salaried applicants to have work experience of at least 6 months to 1 year in their current organization. Thus, those planning to avail themselves of personal loans in the near term should avoid job switches to the maximum extent possible.

Low Credit Scores

Lenders usually consider the credit scores of their personal loan applicants’ to evaluate their creditworthiness. They prefer sanctioning personal loans to applicants with credit scores of 700 and above. Loan applicants with lower credit scores are considered to lack financial discipline and, therefore, carry higher default risk for lenders. Hence, lenders are more likely to reject such applicants’ personal loan applications. Although some lenders may approve personal loan applications for those with low credit scores, they usually set higher interest rates for such applicants.

As one may need to avail of personal loans at short notice to tackle financial or medical emergencies, try to maintain credit scores of at least 750 or above to increase your personal loan eligibility. Prospective applicants can improve their credit scores by following healthy credit practices like repaying their credit card bills or EMIs by the due date, avoiding multiple credit card or loan applications within short periods, etc. Prospective applicants who have never availed a loan or a credit card can avail credit cards to build their credit scores.

As credit card transactions are considered equivalent to availing any loan, credit card transactions are also reported to the credit bureaus to calculate credit scores. Therefore, using credit cards to make payments and repaying your credit card bills by their due dates would help improve your credit scores. Prospective personal loan applicants can apply for secured credit cards if they are not eligible to avail of regular credit cards to help build their credit scores.

Approaching Multiple Lenders within Short Duration

Whenever prospective borrowers apply for personal loans with any lender, it fetches their credit reports from the credit bureaus to assess their creditworthiness. Such credit report requests from lenders are known as hard inquiries. Credit bureaus will reduce a few points from your credit score for every such hard inquiry. Therefore, those making multiple direct loan inquiries within a short time period may see a significant reduction in their credit scores, thereby reducing their chances of getting personal loan approval. Therefore, prospective personal loan applicants should visit online financial marketplaces and compare offers of multiple lenders before applying for a personal loan. Credit bureaus consider credit report requests from these marketplaces as soft inquiries, which does not affect your credit scores negatively.

Ineligible Occupation Profile

Banks and NBFCs consider your occupation profile while evaluating your personal loan applications. Lenders may not grant personal loan approval if your occupation profile is not included in their list of approved occupation profiles. Similarly, lenders may also reject your personal loan application if your employer is not included in their list of approved employers. They may also reject personal loan applications for self-employed individuals who belong to the negative list of businesses/professions.