Often in life, we can face some situations when we might require some more money than we currently have. For such situations, people can borrow loans from lenders like banks or other financial institutions. Among all the options for loans, a personal loan is one of the easiest ways to secure short term finance for home renovation, marriage, travel, child’s education or any other emergency purposes. However, sometimes people face rejection when it comes to their loan application process.
Listed below are some of the most common reasons that can cause your loan application to get rejected and how you can avoid them.
1. Poor Credit History/Error in Credit Report
When you apply for a loan, the first thing that the bank or lender will do is to check your credit score. A credit score is a 3 digit score that is given to every individual. A high credit score leads to having higher chances of getting your loan approval.
If there is an error in your credit report, then it is recommended that you raise a dispute with your Credit Bureau and get it resolved. Error in your credit report lowers your credit score and may result in your loan application rejection.
2. Submitting Incomplete or Invalid Documents
Your loan application may get rejected if you submit incomplete or invalid documents. Submitting the correct documents shows your eligibility for a loan is very important to get your loan application approved. Hence, make sure you check thoroughly all the loan application guidelines before you submit the documents. You can make a list of all your important documents before submission.
3. Unstable Employment History
Most banks offer personal loans to people who have a stable employment history. If you do not have a stable job or have a history of quitting jobs multiple times then your loan application can get rejected. People changing jobs frequently are considered less worthy by lenders to get loan approvals or the offered personal loan interest rates are higher for those individuals. Your salary certificate helps to prove your job stability
4. Higher Existing Debts
Your loan application can get rejected if your existing debts are on the higher side. If you possess too many open credit lines like credit cards and loans, your prospective lender might consider that you are overburdened with credit and might end up in default. The best way to avoid such a situation is by paying off your current debts and then applying for a new personal loan at low interest rate.
Sometimes, borrowers intentionally minimize their existing debt repayments in the hope of getting a higher loan amount. However, this sort of misinformation can lead to a rejection in the personal loan application as lenders would refer to their credit reports before approving the loan amount.
5. Annual Income Criteria Not Met
Usually, most of the lenders have defined minimum income requirements and if you have applied for a loan amount that is more than your eligibility, then your loan application can get rejected. Also, you can look out for Non-Banking Financial Companies (NBFCs) where your annual income is not the utmost consideration.
6. Multiple Loan Enquiries and Applications
Every time you apply for a personal loan, the bank enquires for your credit report with the Credit Bureau and checks your credit score. These are known as hard inquiries and the credit bureau mentions them in your credit report. Thus when you apply for multiple loans simultaneously, the banks or other financial institutions perceive you as a credit hungry person who is unable to handle his/her money properly and always on the hunt for borrowed money.
Hence, multiple personal loan applications adversely affect your credit score. To avoid this situation, instead of making too many loan applications, do your research properly and compare the options available in your hand. After considering and observing all the options, apply for the loan you want to avail of.
How can you avoid personal loan rejection?
1. Make sure you maintain a clean credit history. This will ensure that you are trustworthy and thus your loan application will get approved.
2. The chances of getting your loan application approved if you are applying through a bank in which your employer is listed on the bank’s list of approved companies.
3. Make sure you have all the required documents with the correct details and your annual income criteria have been met before you apply for the personal loan.
4. Do not forget to monitor your credit report to make sure that everything is accurate.
Although a personal loan is offered at fairly high-interest rates, they are usually favourable during urgent cash requirements, especially when low processing time is a key factor.