Banks and non-banking financial companies (NBFCs) consider several criteria while evaluating personal loan applications. Applicants failing to meet any of those criteria may have their loan applications rejected. Thus, understanding the main factors that lead to loan rejection can improve their chances of personal loan approval. Here are the five main reasons for personal loan rejection.
Low Credit Scores
Lenders usually consider the credit scores of their prospective personal loan applicants as a preliminary check to evaluate their creditworthiness. Banks/NBFCs prefer approving personal loan applications of individuals having credit scores of 750 and above. Those having lower credit scores are considered less financially disciplined and thereby, carry higher risk of loan defaults. Hence, applicants having lower credit scores are more likely to face personal loan rejection. While some banks/NBFCs approve personal loan applications of those with low credit scores, such lenders usually charge higher interest rates from such loan applicants.
As the need for personal loans can arise anytime, individuals should aim at maintaining credit scores of 750 and above for higher loan eligibility. They can improve their credit scores by following healthy credit practices like repaying credit card bills and EMIs by their due date, avoiding making multiple loan/credit card applications within short durations, etc. Individuals who have never availed a loan or credit card can avail credit cards to build their credit scores. As transactions made through credit cards are reported to the credit bureaus, you can use credit cards for payments and to repay your bills by their due dates, which in turn will steadily build your credit scores. Individuals who cannot avail regular credit cards can opt for secured credit cards to build their credit scores.
Individuals should also fetch their credit reports from credit bureau(s) at regular intervals to detect anomalies, if any, in their credit reports. Alternatively, such individuals can also visit online financial marketplaces to fetch their credit reports. Any error/incorrect information and fraudulent credit activity detected in the credit report should be reported to the concerned lender and credit bureaus for rectification. Rectified credit reports might improve your credit scores and thereby, increase your chances of availing personal loans at lower interest rates.
Lower EMI Affordability
Banks/NBFCs also consider their applicants’ loan repayment capacity while evaluating their personal loan eligibility. Lenders usually prefer approving the personal loan applications of individuals having their monthly loan repayment obligations, including their proposed personal loan’s EMI, within 50-55% of their net monthly income. Applicants exceeding the aforementioned limit can improve their personal loan eligibility by selecting longer tenures and/or lower amounts on their personal loans. Doing so will lower their proposed personal loan’s EMI and thereby, bring down their monthly debt obligation within the 50-55% limit. Applicants can use personal loan EMI calculators provided by many lenders on their websites or use the EMI calculators for personal loan from Paisabazaar or other online financial marketplaces to know the optimum EMI and repayment tenure for their proposed personal loans.
Unstable Employment History
Lenders consider their personal loan applicants’ employment stability while evaluating their loan applications. Those who switch jobs frequently are considered to carry higher credit risk for lenders and hence, have lower chances of availing personal loan approval.
Moreover, some lenders also require their salaried applicants to have at least 6 months to 1 year of service in their present organisation. Thus, individuals planning to avail personal loans in the near future should avoid frequent job changes to improve their chances of availing personal loans.
Approaching Multiple Lenders within Short Duration
Whenever you apply for personal loans, your lender will fetch your credit report from the credit bureaus to assess your creditworthiness. Credit report requests initiated by lenders are known as hard inquiries. Credit bureaus reduce the credit score of a loan applicant by a few points for every such hard inquiry. Therefore, making multiple hard inquiries within short time spans may drastically reduce the applicant’s credit score and lower his/her chance of availing personal loans. To avoid this, applicants should visit online financial marketplaces to compare personal loans of multiple lenders before making the final loan application. Credit bureaus consider such credit report requests as soft inquiries, which have no adverse effect on your credit score.
Ineligible Occupation Profile
Banks/NBFCs also consider your occupation profile during their personal loan evaluation process. Lenders may reject personal loan applications of individuals whose occupation/employer profile is not within their list of preferred employer/occupation profiles. Lenders may also reject your personal loan application if you are working for an organisation not present in their list of approved employers. Even within self-employed applicants, lenders may reject personal loan applications of those belonging to their negative list of businesses/professions.
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