Personal loans can be a lifesaver especially when you need money. You can apply for personal loans in various banks and every bank has a different evaluation method.
You can use a personal loan to start a new business, fund education, manage medical expenses, or fulfill a dream vacation but getting a personal loan can be challenging.
Lenders rigorously assess applications before approval and it isn’t always smooth. Facing rejection on a personal loan application can be disheartening and frustrating, potentially hindering your financial plans. But don’t worry, some ways will slim the chances of your loan application getting rejected.
In this article, we will discuss How to Avoid Rejection of a Personal Loan Application but first, let’s find out what are the reasons for personal loan rejection.
Reasons for Personal Loan Rejection
The following are the reasons a personal loan can be rejected:
Choosing the Wrong Bank
The very first mistake that can result in personal loan rejection is choosing the wrong bank. You’ll have to choose the bank that best suits your profile instead of any bank.
Low Credit Score
A low Credit score makes getting any loan difficult, you need to improve your Credit Score.
Documentation Error
The document that you submit may have some error and if you submit the loan application with those errors then that can be a documentation error.
Insufficient Income
Lenders typically assess your income to determine your ability to repay the loan. If your income is too low or unstable, it might be considered a high risk for the lender, leading to loan rejection.
High Debt-to-Income Ratio
If your existing debt obligations (such as credit card debt, mortgage, or other loans) are too high compared to your income, it could signal to lenders that you might struggle to make additional loan payments.
Employment History
Having a stable job with a consistent employment history demonstrates your ability to generate a steady income. Frequent job changes or unemployment can be seen as risky by lenders.
Lack of Collateral or Guarantor
Personal loans are typically unsecured, meaning they don’t require collateral. However, if you’re applying for a secured personal loan or a loan with a guarantor and you don’t meet the requirements, it could result in rejection.
Inaccurate Information
Providing incorrect personal information or financial details on your loan application can lead to rejection. Lenders verify the information you provide, and inconsistencies can raise red flags.
High Number of Loan Applications
If you’ve applied for multiple loans within a short period, it can negatively impact your credit score and make lenders hesitant to approve your application.
Insufficient Credit History
Having no credit history or a very short credit history might make it difficult for lenders to evaluate your creditworthiness.
Loan Amount
Applying for an excessively high loan amount that doesn’t align with your income and repayment capacity can result in rejection. Lenders want to ensure that you can comfortably manage the loan payments.
How to Apply for a Personal Loan with Getting Rejected?
The following are the steps and procedures that, if followed, can improve your chances of getting a personal loan-
- The very first step for you is to find the best bank where you can get a personal loan at affordable interest rates and with minimal documentation and scrutiny
- Upon shortlisting, you’ll have to check out the eligibility criteria and whether you fit that criterion or not based on that again shortlist
- The final list will contain all the banks where the chances of your loan getting approved will increase
- Now, you’ll have to apply for the top 2 banks in the list using an online method or visiting the bank branch
- Do not apply to too many banks as it negatively impacts your credit score
- After the application is submitted with documents, you’ll have to wait and let the processing take place, you may also need to pay the processing fee for this
- After that, you’ll be contacted by the bank and they will tell you about the interest rate, tenure, and loan amount
- If you agree to these terms, you can continue to complete the loan application process by E-Mandate
Documents Required for Applying for Personal Loan
The following are the documents required for applying for a personal loan-
- Identity proof (copy of passport/voter ID card/driving license/Aadhaar Card)
- Address proof (copy of passport/voter ID card/driving license/Aadhaar Card)
- Bank statement of previous 3 months (Passbook of previous 6 months)
- Two latest salary slips/current dated salary certificate with the latest Form 16
FAQ
Lenders reject personal loan applications for various reasons like bad credit scores, insufficient income, high debt-to-income ratio, and other profile-related issues.
Lenders want assurance that you can repay the loan. A steady income demonstrates your ability to make consistent payments. Your ITR Filings, GST, and Bank account statement display that.
No, applying for multiple loans at once can negatively impact your credit score. Each application leads to a hard inquiry on your credit report, which can lower your score.
Evaluate your needs and ability to repay. Choose an amount that aligns with your financial capacity.
Having a co-signer with a good credit history can improve your chances of approval. However, remember that both you and the co-signer are equally responsible for repaying the loan.
