Personal loans are loaded with lots of unique and key product features, namely- quick disbursal, no restriction on end usage of funds, no collateral requirement and being offered by almost all lenders. Hence, personal loans have for years been an ideal source of funds for those requiring money urgently for varying life purposes. However, many borrowers are left clueless and become disheartened when their application is rejected by lenders. Even those who require a small loan of loan amount like 1 Lakh personal loan, facing rejection leaves little hope to go ahead with another application, especially if the reason for rejection is not clear.
While the reasons behind the rejection of the loan can be not one but many, knowing the primary grounds on which a borrower’s application tends to get rejected would assist them to have those grounds cleared before deciding to submit an application upon knowing the low personal loan interest rates being offered by many lenders to applicants with good income and credit profile:
No or poor credit score- Many lenders prefer accepting applications and offering low rates to borrowers with a good credit history, as it shows financial discipline and high repayment capacity. The presence of poor credit history shows that the personal loan borrower hasn’t been handling loans or credit cards diligently &, therefore, is more likely to default in future as well. Irregular credit card bill payments & skipping or delaying any loan EMIs are some credit actions that are displayed as inconsistentor irregular repayment behaviour that can lead to low credit score or negatively impact the current credit score.
Additionally, new to loan or credit borrowers, which imply to individuals who have never availed a loan or credit card, don’t have a credit history to show credit repayment behaviour. Due to the lack of credit history, some lenders may find it riskier to lend to such borrowers, and thus, many borrowers may get their personal loan rejected, or they may be charged higher or elevated personal loan interest rates than others.
Failure to meet basic eligibility criteria- Each and every lender has their own set of eligibility criteria for different loan products offered by them. Irrespective of whether the requirement is as small as a 1 Lakh personal loan or a big-ticket one, borrowers have to meet these personal loan eligibility criteria in order to avail of the loan or credit card. These personal loan eligibility criteria usually include minimum income & age, area of residence, credit score, existing EMIs, etc. During the process of an application evaluation, many borrowers’ personal loan applications get rejected in the first stage due to failure to meet the basic personal loan eligibility criteria or if their home address falls in the unserviceable area.
So, to avoid such disappointments after submitting your loan application for amounts like 1 Lakh personal loan, borrowers must make use of loan eligibility calculators before submitting their loan applications. Moreover, being ready post checking the eligibility also assists the borrower to get low and attractive personal loan interest rates from the lender, as it makes the borrower get depicted as financially disciplined and able enough to timely repay the loan.
Incorrect documentation- Another common reason behind personal loan rejection is the non availability of adequate documentation. Proper documentation is essential for a loan application’s processing and approval. Failure to be able to timely submit the essential set of documents when applying for the personal loan will lead to its rejection. Before submitting your personal loan application to any bank or lender, always ensure to be prepared with the essential documents. This eases the personal loan process, and your chances of loan approval get boosted with the right documentation. Once the application is submitted with the right documentation and the presence of a good credit profile, chances of getting good personal loan interest rates become higher.
High level of EMI to Income ratio- EMI to Income ratio refers to the proportion of borrower’s income being paid out as monthly instalments for loan EMIs. Most lenders generally prefer giving personal loan to borrowers with EMI to Income ratio of up to a maximum of 50%, including the current personal loan application’s EMI. If your FOIR is beyond 40-50%, the chances are quite high that your personal loan may get rejected by the bank or lender. Boost your personal loan eligibility by trying to prepay an existing loan or opt for long repayment tenure, as it translates to a lower EMI amount when aiming to get an application accepted, along with fetching low personal loan interest rates.
Errors in a credit report- The presence of errors in your credit report or history may hinder your chances of personal loan approval. Such errors can include errors like incorrect reporting of personal loan EMI or any other loan EMI & credit card bill payments, already closed loan accounts still displayed as open, etc. Many individuals or borrowers get their personal loan applications rejected on the grounds of inaccuracies found in a credit report, even for low loan amounts like 1 Lakh personal loan. Also, such errors in credit report may be a sign of fraud or identity theft. To avoid such rejections, it is advised to check and review your credit report periodically so that you can spot such errors and get them rectified timely before they harm your loan approval or result in getting high personal loan interest rates.
No stability in employment history- Many times, numerous lenders tend to hesitate lending to those possessing a history of frequent job switches. Even though borrowers opt for frequent job changes for better careers and higher income, this is seen as a sign of an unstable income or career in the eyes of the banks or lenders. Therefore, such personal loan borrowers seem to be less creditworthy for most banks or lenders, especially for unsecured loans & medium to long term loans such as home or car loans, which require longer commitment from the borrower’s side.
Taking an example to gain more clarity, suppose a lender may require a condition of 3 years continuous employment with the current company to grant a loan to any borrower. Hence, many borrowers who have been frequent job hoppers in the past often end up getting their 1 Lakh personal loan application rejected.