Lenders assess numerous factors before sanctioning a personal loan, and a rejection can downgrade your credit score and affect the possibility of availing a personal in the future.
1. Introduction: Why Personal Loans Get Rejected
Anyone can consider taking a personal loan, since it may come in handy in situations like an emergency or when one needs money for essential purchases. But not all applicants receive approval on such loans. Lenders consider various elements before approving a personal loan and rejection of a loan has further consequences to credit scores and subsequent loans.
The following are some of the causes that explain why personal loans are turned down:
Low credit score – Credit score should be at least above 750 so that the applicant is approved.
High debt–income ratio – If you already have many active loan in portfolio, you are considered risky by lenders.
Lack of steady income – It is important to maintain a fixed source of income since going through the application process takes quite a lot of time.
Multiple recent inquiries – Submitting many loan applications at close range decreases creditworthiness.
Lack of proper documentation – bad credit history and poor paperwork can cause refusal in a loan request.
Protip: To increase your chances of getting approved for personal loans, you must understand why your application was rejected in the first place. Here are some ways you can improve on your credit worthiness and hence be in a position to secure a personal credit loan.
2. Check and Improve Your Credit Score Before Applying
Credit score is among the key guarantees in the personal loan approval process. Banks employ it to have a look at your ability to pay back and evaluate the level of risks involved. For instance, a credit score above 750 improves the chances of securing a personal loan with better interest rates.
Steps to Improve Your Credit Score:
- Go through the credit report – Get the credit report from CIBIL or other credit bureaus and look for any anomalies.
- Make your current EMI and credit card dues on time – Payment history contributes to 35% of the credit score.
- Maintain a credit utilization rate of below 30% – You should not fully utilize your credit card limit as this will reduce your score by a significant margin
- Do not open multiple loan applications – Each credit check reduces the score for a short period.
- Regularly check your credit report – Checking one’s credit report can help individuals to identify and rectify errors in order to maintain a good credit score.
Did You Know? Applying for a personal loan involves a hard pull, which causes a drop in your credit score by 5-10 points. Applying with a weak credit score relays one’s chances of being rejected.
3. Maintain a Low Debt-to-Income Ratio (DTI)
Most of the lenders use the debt-to-income ratio (DTI) to make as assessment on an ability to repay back the loan amount. A high DTI means that more of your income is dedicated to paying back loans, therefore, banks hesitate to grant loan during such circumstances
How to Calculate DTI?
DTI = (Total Monthly Debt Payments / Monthly Income) × 100
For example, if your total EMIs are ₹40,000 and your monthly income is ₹100,000, your DTI is:
(40,000 / 100,000) × 100 = 40%
Lenders prefer a DTI of 40% or lower for personal loan approval.
Tips to Reduce DTI:
- Clear all existing balances before approaching for a new loan.
- Do not borrow more than one loan at a time.
- If you need more money in your account, either get another job as a way of seeking other sources of income or negotiate for a better pay rise at your present workplace..
4. Choose the Right Lender Based on Your Profile
While applying for a personal loan a lot of students have come across the fact that different creditors have different requirements. Different sources have further conditions; conventional lenders such as banks are selective while NBFCS and online lenders approve loans to applicants with low credit scores.
How to Choose the Best Lender?
- If your credit score is high (more than 750), approach banks to get a better rate of interest.
- If your credit score range is between 650-750, then going to NBFCs will be an ideal solution, they are less stringent.
- For those whose credit score is below 650, look for fintech lenders who offer small amount loans or secured loans.
Pro Tip: Before sign up with any lender, it is recommended to use a loan eligibility calculator featured on the Internet financial portal to compare the offers. Also, verify if the lender is safe. There are many unscrupulous loan sharks hiding under the guise of loan app, be sure to check all the reviews of app from neutral websites and choose one. Borrowing from a unknown loan app might prove to be a costly mistake
5. Apply for a Loan Amount You Can Afford to Repay
Loan approvals depend on the ability of the borrower to repay. If you request a higher amount compared to your income, your application could be rejected.
How to Determine the Right Loan Amount?
- Always make sure that your equated monthly instalment or EMI should not cross the 40 percent of your net monthly income.
- It is advisable to use a personal loan EMI calculator to determine the amount one can afford to pay.
- One should consider going for longer loan tenures so as to reduce the monthly instalments that they have to pay.
Protip: Using an EMI calculator on our online financial aggregator platform, Fincover.com could help you arrive at the exact loan amount you need
6. Consider a Co-Signer or Guarantor If Needed
For instance, when your credit score is low or you cannot provide provable regular income then adding a co-signer or guarantor can be of great help.
Who Can Be a Co-Signer or Guarantor?
- A spouse or family member with a good credit score.
- A friend with a stable financial background.
- An employer (in some cases).
- It exposes the co-signer to repayment responsibilities in case you fail to meet your obligations, thus, lowering the risk on the side of the lender.
Expert opinion: Getting personal loan is not a daunting task these days. Even if the borrower faces rejection from few banks, there are other ways to apply like applying with a co-signer or guarantor with a good record. We at Fincover.com, constantly encounter such borrowers and ensure they get their loan needs fulfilled – Kumaran, Director, Fincover
7. Show Stable Employment & Income Proof
- Employment stability is highly valued by the lenders because they need to be sure that their debtor is able to repay the loan, and having a stable source of income can guarantee this. However, if you change your job often or if you have an unstable income, your loan application usually gets rejected.
- How to Improve Your Profile?
- It is recommended not to switch jobs for at least within 6-12 months before applying for the loan.
- For self-employed individual, provide records of steady income through ITR (Income Tax Returns for at least 2 years).
- Be sure to have copies of the bank statements which will testify to the fact that regular salary credits are made to your account.
8. Avoid Applying for Multiple Loans at the Same Time
The mistake of applying for several loans at once negatively impacts the credit rating and is a sign of financial hardship to the lender. Each loan application will lead to a hard inquiry on your credit file and have a negative impact on your creditworthiness.
What Should You Do Instead?
- Preapproved loan offers allow you to see if you qualify for a loan without harming your credit score.
- Applicants are advised not to apply for a loan with multiple companies since the process will be simpler to just compare the lenders on a net neutral online personal loan DSA aggregator like Fincover
- It is also important to space out loan applications 6 months apart.
9. Correct Any Errors in Your Credit Report before Applying
Errors in your credit report can lead to loan rejection. Hence it is advised to check the following details whenever you apply for a loan:
- Check if personal details are updated properly
- Inaccurate loan repayment history
- Unrecorded closed loans.
- Fraudulent or unauthorized transactions.
Steps to Fix Credit Report Errors:
- Check your credit score at any of the credit bureaus which include CIBIL, Experian or Equifax and get a free credit report.
- You need to identify mistakes in the credit report and then forward these mistakes to the credit bureau.
- Raise a dispute with the bureau and correct the wrong entries made in their records.
- Do not apply for a personal loan before waiting for the rectification.
Did you know? You can also avail a credit score improvement service like Credit360 from Fincover.
10. Conclusion: The Best Strategies for a Smooth Loan Approval
Personal loans can be procured easily if plenty of thinking and strategic planning is done along with a good credit history. The best results can be achieved by following these tips:
- Maintain a credit score above 750.
- A person’s debt-to-income ratio should be low, preferably below 40%.
- Select the right lender according to your profile.
- Make sure you borrow a plausible amount that you would be able to repay at the set date.
- Co-signer is another option as a guarantor if you need help to guarantee your loans.
- Create job security or a stable employment record as the proof of income.
- Minimize the number of loan applications applied for at one time.
- Perform credit report maintenance on a frequent basis and look for mistakes.
Implementing these strategies can significantly improve the odds of getting a personal loan approved and obtain the necessary funds you need without much difficulty.
