6 Common Reasons for Personal Loan Rejection

Banks and other financial institutions provide a variety of loans to suit different needs. With time, technology has expedited and improved the loan application process. People may now have easy access to loans. The most popular loan product in India's debt market among these is the Personal Loan.

In India, more than 78% of all credit applications fall into this category. These loans are a common choice among potential borrowers because they are unsecured.

However, some individuals experience rejection during the loan application process. Without careful consideration, a Personal Loan application may be denied or rejected.

Knowing why your loan application is rejected can help you the next time you apply for a loan. So, if you’re wondering why your loan or application was rejected, read on to know more!

Most Common Reasons for Your Personal Loan Application's Denial

Let us have a look at the common reasons for personal loan rejection here in detail-

1. Having Poor or No Credit Score

A lender's decision to grant you a loan is significantly influenced by your credit score, which ranges from 300 to 900 and essentially represents your creditworthiness or financial health. Lenders generally have a minimum credit score requirement before approving a Personal Loan.

This might just be one of the most prominent loan rejection reasons out of many. You won't be approved for the loan if your credit score falls below this. Candidates without a credit score may also be turned down because a lender cannot evaluate their spending habits without a credit history.

2. Several Loan Inquiries and Applications

You might frequently submit multiple Personal Loan applications when you inquire about Personal Loans from different lenders. But remember that every time you apply for a Personal Loan, the bank will check your credit score and order a copy of your credit report from the Credit Bureau.

Due to this, lenders and banks may begin to doubt your financial credibility and perceive you as credit-hungry and in need of money.

3. Numerous Pending Loans

This is one of the most significant reasons for Personal Loan rejection reasons. Your Personal Loan application might also be denied if your current debts and other obligations consume most of your income.

It is advised only to take out loans when necessary and to make sure you pay your instalments on time because banks can access your financial profile and credit situation even if you have taken out loans from third-party banks. Your likelihood of obtaining a Personal Loan decreases if you have numerous active debts with banks and NBFCs.

To prevent your application from being denied, it is advised to keep existing debts to a minimum and to set aside at least 50% of your monthly salary.

4. Income Requirements Not Met

Financial institutions want to be sure they will receive their money back on time before they approve a Personal Loan. Lenders investigate the applicant's income to guarantee timely loan repayment.

Having a sufficient and steady income demonstrates your ability to pay back all your EMIs on time. Because salaried employees have set income levels and sources, it is simpler for them to obtain a Personal Loan than it is for self-employed people.

For salaried and self-employed borrowers, most lenders have established minimum income requirements. If you have applied for a Personal Loan amount exceeding your eligibility, your loan application will likely be denied.

5. Documentation Eligibility Parameters Not Met

Only after your documents have been validated will your Personal Loan request be approved. Your lender will deny your loan application if any required documentation is missing or contains conflicting information.

The documents you submit with your Personal Loan application are just as important as the ones you submit alone. The information you provide on your Personal Loan application, such as your name, age, income, and address, is crucial for the lender to gather the necessary data about you.

Your loan request will be denied if lenders discover errors in any of these or other information provided in your Personal Loan application.

6. History of Unstable Employment

Your employment history will also determine whether your Personal Loan is approved. This may be the most important loan rejection reason. Your request for a Personal Loan will be denied if you switch jobs too frequently or cannot demonstrate consistent employment over a predetermined period.

Most lenders frequently turn down applicants who work for unregistered businesses or receive cash salaries. Lenders scrutinize your employment history to reduce the likelihood of loan default.

As a result, applicants with less than a year of work experience or who have only been with their current employer for six months or less might have their loan request denied.

You may also want to read Loan Frauds in India and Ways to Avoid