Common Personal Loan Rejection Reasons and How to Fix Them

A personal loan is unquestionably one of the most convenient and attainable means of securing funds that help individuals meet their financial requirements. As a crucial resource, it offers the required capital in emergencies. The personal loan rejection rate is high in India, even though it offers seamless access to the required funds. When you understand personal loan rejection reasons and how you can fix them, you substantially boost your loan approval chances. 

From inaccurate documents to poor credit scores, several personal loan rejection reasons make it tough for individuals to obtain the loan they need during pressing times. it is essential to Apply for Personal Loan only after ensuring your documents are accurate, your credit score is good, and you meet income criteria.  However, rejection of a loan can adversely impact your financial planning. It can even lead to unwanted stress during critical times.

Top Reasons for Personal Loan Rejection and Useful Tips to Avoid Them

Listed below are some of the primary reasons why banks and/or financial institutions reject personal loans. Also, we share some significant tips that will help you avoid rejection whenever you apply for a personal loan.

• Numerous Recent Inquiries Lead to Personal Loan Rejection

Have you been applying for numerous loans or credit cards in a short span? If that’s the case, you must stop doing so immediately. That’s because the credit bureaus consider and report these enquiries as hard inquiries. Multiple loan inquiries raise an alert for loan misuse. As a result, it leads to personal loan rejection.

How You Can Fix:

• Avoid applying to many lenders at once.
• Wait for at least 3 months between loan applications after the initial non-approval.
• Make sure you thoroughly check eligibility requirements before applying for the loan.

• Low Credit Score or Poor Credit History

A low credit score or thin credit profile is one of the most common reasons why a personal loan is not approved by the bank or financial institution in the first place. If your CIBIL score is not above 700, most lenders will treat you as an individual with a high risk. Your unwanted credit rating enhances the possibility of the personal loan being declined.

How You Can Fix:

• Check Your Credit Report Regularly: Detect mistakes and get them rectified. Errors, such as incorrect account details or late payments, can unduly affect your credit score.
• Pay Off Outstanding Dues: Clearing all your existing loans or credit card dues exhibits responsible money handling.
• Make Payments on Time: You must make sure all monthly installments and credit card bills are paid promptly. Upon doing so consistently, your credit score will improve over time.
• Never Go for Several Loan Applications: Several loan applications in a short duration can be detrimental to your credit score.

• High Debt-to-Income Ratio

Your DTI (short for debt-to-income ratio) is evaluated by banks or financial institutions. It is the percentage of your income you earn every month that goes toward outstanding debts. If you have a high DTI, it suggests that you might have a hard time repaying new loans. As a result, it will lead to personal loan rejection.

How You Can Fix:

• Lower Outstanding debt: Focus on clearing loans that carry a high interest and credit card balances.
• Boost Your Sources of Income: Extra income streams, including freelancing or part-time work, can help boost your DTI ratio.
• Choose a Smaller Loan Amount: If your DTI is high, opt for a lower loan amount. That is because this amount seems more attainable to lenders.

• Incorrect or Half-done Documentation

When you submit incorrect or half-done documents, it leads to personal loan rejection. Banks, lenders, or financial institutions require address proof, identity proof, income proof, and details of employment. Even a slight error can result in the loan application being rejected.

Also Read this Blog: Instant Cash Loan in 1 Hour Without Documents

How You Can Fix:

• Verify All Documents Before Submission: You must make sure that all documents are correct and updated.
• Provide Clear Income Proof: Bank statements, salary slips, or ITR must show your current financial condition.
• Double-check Personal Details: Basic details, such as your name, date of birth, and contact information, must match across all documents submitted for applying for a personal loan.

• Job Instability or Probation

Before approving any personal loan application, stable jobs and regular incomes are what lenders prefer. If you happen to switch your job frequently or being is one of the most common reasons why your application for a personal loan is rejected. Even being on probation could lead to a decline in personal loan approvals.

Here’s why your application for a personal loan may be rejected due to job instability:

• Lenders are doubtful of your ability to make loan repayments. That’s because you don’t have a stable job.
• Due to career breaks or changes, lenders feel that you are at a greater risk of causing unwanted delays or defaulting on loan payments.

How You Can Fix:

• Apply for a personal loan after you finish your probation or get a pre-approved offer.

• Display stability in your job for at least 6 or 12 months of uninterrupted work

• If you are working as a freelancer, you must pay attention to maintaining correct business records and tax returns.

• If you are running a business, it should be functional for no less than 2 years.

• KYC Mismatches

A KYC mismatch in your address proof or ID proof is one of the most common reasons for a rejection in the personal loan disbursement. If there is any discrepancy in your Aadhaar card, PAN card, or bank account details across documents, lenders will have second thoughts about approving your personal loan application.

How You Can Fix:

• Always ensure that your KYC is adequately updated. There should be no mismatches before you apply for a personal loan. It consists of minor details, such as a faulty name and address.

• Cross-check that the information you have provided in your documents is reliable and the same everywhere.

• Past Defaults or Loan Settlements

If you, as a loan borrower, have caused a delay in loan payments, have unclosed accounts, or on loans, this will be considered risky by lenders. Even the settlement on a loan is not considered by the lender.

How You Can Fix:

• Make sure all the outstanding debt is cleared on time.

• If your credit profile has some mistakes, then raise a query immediately. Try to resolve the dispute at least 3 months before you apply for a personal loan.

The Bottom Line

While a personal loan rejection can be frustrating, it does not signify that your financial journey is over. Understanding some of the most common reasons for loan rejection and taking preventive steps, you can considerably boost your loan approval chances.

Don’t forget that lenders consider sensible borrowers with the ability to make loan repayments on time. Building a robust financial record and rectifying any limitations in your loan application can always turn a prior no into a yes.

Frequently Asked Questions