Personal loans are one way to resolve the problem of immediate requirement of cash. It is a convenient 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 or auto loan.) However, this flexibility comes 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.
Below are some of the factors to keep in mind to avoid rejection of your personal loan application.
1.Your credit score: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, obtain a copy of your latest credit report and check your score. Since a personal loan does not require any security, banks are anxious to safeguard their money against customer default. 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. Make sure that you improve your score to at least 750, if required, before you apply for a personal loan.
2. Insufficient income: Again, due to lack of any collateral, 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, then 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.
3. Incorrect details on your credit report or loan application: Make sure that all the personal details on your credit report and your 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 details on your credit report, you will need to get them corrected immediately. Similarly, there may be reporting errors regarding the status of previous loan accounts. It is important to ensure that all your details are accurate to avoid rejection.
4. Existing loan portfolio: If you have a number of current loans and the lender thinks you will not be able to take on another EMI on your existing income, they will reject your application. It is better to apply once you have paid off a few loans so that your EMI burden as a percentage of your monthly income is reduced.
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 you are short of credit and need to apply to several sources to make up the shortfall. Lenders are worried that you will not be able to repay your loan and will be inclined to reject your application.
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. Make sure that you meet all the requirements before you apply for a personal loan.