We’re living in the digital era of the 21st century, and the process of applying for an instant personal loan has become really quick and convenient. With minimal documentation and easy approvals, procuring personal loans can be a lifesaver during money crunch situations or any unforeseen expenses. However, not all loan applications turn out to be successful. Whether you apply through a bank branch or go via the digital route, the reasons for refusal exist in both situations. Understanding the reasons behind personal loan rejections can help an individual improve their chances of approval. When a personal loan is denied, it can be quite disappointing, so it’s important to understand the causes and the necessary steps to prevent it from happening again later. With simplified application processes and at the click of a few buttons, instant loans can be availed by an individual. There are many sites online that help in the facilitation of this process – KreditBee, Kissht, Bajaj FinServ, LazyPay and more.
Keep reading to find out about some of the most common reasons of loan rejection, in order to ensure you do not fall into this category anytime.
- Poor Credit Score
A credit score refers to a number between 300 and 900 that reflects how creditworthy you are. A primary reason and one of the most common causes for loan rejection is the borrower’s low credit score. Lenders use your credit score to determine your worth in order to grant the loan. As per acceptable norms, a credit score less than 650, depending on the lending party is usually considered unfavourable. The personal loan application is accepted by a banking company when their score requirement is met. For third party digital apps, instant loans may be awarded without a high credit score too, but the amounts may be quite limited in nature. To avoid facing loan rejection, paying bills/EMIs on time is crucial.
- Multiple Loan Applications
Applying for more than one loan together or within a short period of time can negatively impact the credit score and deny the loan request. Each time an application is filed, it triggers a hard inquiry, which slightly reduces the credit score. If you plan to apply for a personal loan from multiple lenders, the bank will inquire about the credit report before giving the loan. When the report from the Credit Bureau shows that requests to multiple lenders have been sent, the person comes across as desperate and questions on financial position are raised. It’s always better to apply and enquire about personal loan only from one lender at a time, whether digitally or through a physical bank.
- Existing Debt Liability
Online approval of your personal loan can be hampered if there exists a high amount of unpaid debt. If you currently have open credit balances in the form of EMI payments or unsettled credit card bills, the prospective lender will assume you are burdened with credit. In almost every case, lenders assess your Debt-to-Income (DTI) ratio to determine your repayment capacity. If a major chunk of your income is already going towards other loan or bill repayments, you may be seen as over-burdened. As a result, another fresh application is highly likely to serve as a ground for facing rejection. Thus, you must only apply for a loan as per your actual repayment capacity and never go overboard, to avoid any financial issues later.
- Insufficient Income
Whenever one applies for a loan, the applicant’s annual income is enquired by the lender. The bank or any digital platform checks for the income (whether salaried or self-employed) and asks for submission of salary slips in majority of the cases to ensure proper repayment of the potential loan amount can be done. Even if you have a decent credit score, your income plays a crucial role. A stable income is indicative that you have the capacity to return back the amount on time. If your declared income does not meet the lender’s criteria limit or seems insufficient to manage the loan repayments, your application may be declined. Therefore, if there is even the slightest chance of the request getting rejected due to income as a reason, talk to the lender before you fill out the application.
- Employment Instability
Another significant reason that many loan applications see the light of refusal is due to the applicant’s unclear employment history. A person’s occupation plays a key role in the approval of personal loans. Lenders prefer to provide loans to people who work in known, verifiable and stable organizations. Frequent job changes, being self-employed without a stable income, or working with a company not genuinely recognized by the lender can greatly impact your chances of loan approval. If your company isn’t listed or registered in the bank records, the application may be rejected. Therefore, the borrower’s focus should be on striving to maintain a reliable employment record.
- Faulty Documents
A personal loan application is approved only after all submitted documents have been thoroughly verified. If any required document is missing or contains inconsistent information, the application is likely to be declined. The supporting documents are just as important as the loan application paper itself. Banks completely rely on the information stated in the form to assess your eligibility and make decisions for approval or rejection. Any mismatch or incorrect detail can lead to the application going against your stride. For online loan applications, the verification process is relatively quicker and easier. If the documents shared – such as bank statements, salary slips or any of the identification proofs are unclear, illegible, or do not possess the authentication capacity, then the system may automatically reject your application.
While digital personal loan applications are surely convenient and fuss-free much like the generation today prefers it, but the approval still depends on varied financial and technical criteria. Though there are many more reasons for rejection, the above mentioned are the most common and widely rampant ones, which are seen in majority of the cases around us. To improve your chances of selection and acceptance, maintain a high credit score, provide accurate information and avoid over-borrowing of money. Understanding the possible reasons for rejection can go a long way in being better prepared for getting a successful loan application your way.