6 Common Reasons for the Rejection of a Personal Loan
Personal loans are an excellent source of money for meeting various types of needs-from paying off debts to financing a trip abroad. Unfortunately, rejection is also very much in the cards. And especially when you are left wondering why it happened at all. That's why knowing the most common reasons for personal loan rejections helps you know what might go wrong and to work on it before sending off the application.
In this blog, we look at the six most frequent reasons personal loans go wrong and how you can ensure you don't end up in that position to secure the access to funding you deserve.
1. Low Credit Score
One of the common causes of rejection for personal loans is low credit score. This is known as your creditworthiness and financial history. Applications for a person with a bad credit score are risky to lenders because a bad score might indicate previous problems handling debt, missed payments, or defaults.
How to Avoid This:
If you have bad credit, get it a clean slate at first. Pay your bills on time. Reduce outstanding balances on credit cards and avoid taking new debt. You should also scrutinize your credit report for errors and dispute inaccuracies that are lowering your score.
2. High Fixed Obligation to Income Ratio (FOIR)
Another essential measure used by lenders is your Fixed Obligation to Income Ratio, or FOIR. It works out the percentage of your monthly earnings dedicated to paying off other existing debt obligations like EMIs, rent, and other regular payments. If large portions of the income are already allotted to these obligations, there is a higher possibility of your application being rejected as there will not be sufficient disposable income available to service the new debt.
How to Avoid This:
Alternatively, if you pay off smaller debts before getting a new loan, your FOIR will be lowered. High income also increases your FOIR ratio, making you a better candidate in the eyes of lenders.
3. Unstable Employment History
The lender is assured of a stable income, for the most part, and therefore views employment stability as a good criterion for lending. If you have jumped from job to job, or have significant gaps between jobs, or if your position is a high-risk employment, lenders will consider you a higher risk than any other borrower, and this may make them reject you.
How to Avoid This:
Try to maintain continuous employment for some period before applying for your loan, if feasible. If you are also a new joiner at work, then you may also have to wait until you complete at least 6–12 months in the new role to establish stability.
4. Insufficient Income
Lenders have specific minimum income requirements for any personal loan that gets approved. This eliminates applicants who do not have enough income to pay off the loan. For instance, if your income is low and falls below the lender's minimum requirements, then you have no other option but to have your application rejected. The lender will definitely question your ability to take care of monthly repayments.
How to Avoid This:
Before applying, first, you check the lender's requirements for income eligibility; you should ensure you qualify. If you're close to the minimum, you could apply for a smaller amount that can be reasonably managed at the income level.
5. High Number of Recent Loan Applications
When applying for credit, lenders perform a hard inquiry on your credit report. Hence, receiving many inquiries within a short duration is stated to mean that you are experiencing financial stress, thereby meaning you are desperate for credit. This reduces your possibilities of being granted loans and goes against improving your credit score.
How to Avoid This:
Limit your loan applications in a short period. If you are shopping around for the best interest rate, consider getting prequalified or preapproved, which often involves a soft inquiry and won't affect your credit score.
6. Errors in the Application
Common mistakes, which would include incorrect personal details, conflicting financial information, or missing documents, can be reasons for loan rejection. Even if the inconsistencies were not made with intent, inconsistencies in an application could raise red flags to a lender, and you may face a delay or rejection.
How to Avoid This:
Double-check all the details within your application prior to posting it. Your name, address, income, among other details should match the documents you include. Otherwise, you are likely to face some unnecessary rejections
Conclusion
How to Enhance Your Odds for Loan Approval
Having the knowledge of common reasons personal loan applications get rejected will help you take all the essential measures to apply for a loan and get it approved. Maintaining a good credit score, low FOIR, stable employment, and checking through your application twice, can make one appear as a good candidate and, hence, increase the chances of loans getting approved.
If you have any further questions, please don't hesitate to contact us:
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Near Nirman Vihar Metro Station, Delhi, 110092.
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