Personal loans are one way to resolve the problem of immediate requirement of cash. It is a simple loan to apply for since you do not need to provide any collateral and you are free to use the money in any way you like (unlike a home loan or auto loan).

Personal loans can cater to a host of reasons right from meeting a medical emergency to funding a holiday abroad to making the down payment for your home loan/vehicle to just about anything like buying furniture or gadgets.

However, this flexibility comes with a few restrictions. For example, since there is no collateral or security involved in a personal loan, banks have a certain set of criteria when reviewing your personal loan application. Being aware of these factors can help you avoid rejection. Due to the flexibility it lends, personal loans are one of the fastest growing segments of the retail lending.

Owing to the nature of the loan, personal loans are generally not pre-planned, unlike a home loan or auto loan which are applied for after a careful process of selection and consideration. Therefore, it makes it important that your personal loan application gets approved when you are in the need of credit for some pressing reason.  The consequences of a personal loan rejection may be grave.

For Ex: Consider one of your family members is hospitalized and you need credit immediately to fund the hospital bills and you apply for a personal loan as you do not have that kind of an amount handy. If your loan gets rejected in this kind of a scenario, it would only add to the emotional trauma that you are already going through.

Therefore, we bring some pointers that you can keep in mind to avoid rejection of your personal loan application.

1. Your Credit Score:

A good credit score has become an integral part of a loan approval process. It is advisable to have a credit score of 750 and above to have a good chance of your application being approved. If you are planning to apply for a personal loan, or for that matter any loan or a credit card, we would advise you to check your credit score and obtain a copy of your latest credit report.

Since a personal loan does not require any security, banks are anxious to safeguard their money against customer default. The only data that they can base their decision to approve or reject your loan is your income statement or the salary slip and your credit score.

They rely on your credit score and credit report to check if you have a good record of repayment. If you have a low score, there is a chance that your application will be rejected outright, as it portrays that you have not been responsible with credit earlier.  Make sure that you improve your score to at least 750, if required, before you apply for a personal loan.

2. Insufficient Income

Your income is an important determinant of your personal loan approval.  Due to lack of collateral in personal loans, lenders look at your monthly income to see if you will be able to repay your loan. If the repayments on your loan amount cannot be sustained on your income, there is a good chance your application will be turned down. Make sure you apply for an amount that is commensurate with your repayment capability.

Though there is no ballpark figure which can decide what should be your income to borrow a certain sum of money as personal loan, bankers generally do not allow for more than 40% of your net income as EMIs.

3. Incorrect Details On Your Credit Report Or Loan Application

Make sure that all the personal details on your credit report and loan application are accurate. If there are any inconsistencies, your application will be rejected. If there are any mistakes regarding your name, address, PAN number or any other detail on your credit report, you need to get them corrected immediately.

Similarly, there may be reporting errors regarding the status of previous loan accounts. It is important that you check your credit report and ensure that all the errors are rectified. Unrectified errors can cause your credit score to go down.  It is good to ensure that all your details are accurate to avoid rejection. 

4. Existing Loan Portfolio

If you have a number of current loans that you are servicing, another loan will be an added burden on your income. If the lender thinks you will not be able to take on another EMI on your existing income, your application may be headed for rejection.

It is suggested that you keep your monthly EMI as low as possible. Hence, burdening yourself with additional loans while already paying EMI’s of a number of loans might not bode well for you in the long run. While it may seem achievable at first, there is a high chance of missing or delaying repayments. Also, a high debt to income ratio might hurt your loan application as well.

So, if you are availing new loans, it’s prudent to close old loan accounts to track your payments easily. There is also a provision of debt consolidation, wherein you could consolidate all your loans into a single loan, which could help you keep a track of your payments and save you some interest as well.

5. Too Many Applications In A Short Time Frame

If you apply for loans from multiple sources within a short period of time, it signifies that your expenses are way beyond your income and you are making your ends meet by applying to several forms/ sources of credit.

Lenders are worried that you will not be able to repay your loan and will be inclined to reject your application.

Each and every application for credit is considered as a hard inquiry. Increased number of hard inquiries do not bode well for your credit score as it portrays you as a credit hungry person. So, it is good to apply for credit only when you absolutely need it rather than at each and every instance that comes up in front of you.

6. Minimum Income And Employment Requirements

Since repayment is entirely dependent on your income, lenders have certain minimum income and employment requirements which play an important role in the loan-approval process. Often there is a certain level of income below which personal loans may not be approved.

Additional Reading: Personal Loans that cater to individuals with Low Income

In these cases, where you are struggling to meet the minimum income criteria, many fintech lenders may come to your rescue, as they lend to individuals with low income.

Also, certain companies are in the blacklist of lenders due to various reasons like poor Human Resources policies, their operating conditions, etc. If you work for any such company, you may be at risk of getting your loan application rejected.

Make sure that you meet all the requirements before you apply for a personal loan.

Key Takeaways:

If you have been responsible with your credit earlier, you will find it easier to get your personal loan application approved. Also, once your application is approved, continue to show the same behavior towards repaying your personal loan so that you remain credit healthy at all times.