Personal loans

Why personal loan is Getting REJECTED? How to Avoid it?

Personal Loans are one of the most commonly availed loan products in India. Being an unsecured loan, it is sanctioned based on the applicant’s repaying ability and credit score. Unlike other loans which are issued for a specific purpose, a personal loan can be used for a range of purposes. Since, the banks do not obtain any security for it, the verification process before issuing loans is stringent and that’s the reason the rate of rejections in Personal Loans are high compared to other types of loans. That said, you need not be disheartened due to rejections, you can avoid rejection by being aware of the reasons for rejections and taking steps to improve in those areas. All lending institutions before sanctioning of loans follow multiple checks and stringent eligibility criteria to judge a applicant’s creditworthiness.

1.Low Credit Score

It is one of the main reasons behind loan rejection. A low credit score indicates financial mismanagement, missed repayments, or high outstanding debts.

What are the reasons for Low Credit Score?

Credit Score is an important parameter that the lender considers before approving a loan. A credit score of 750+ is considered as a good credit score for lending. It could drop for a variety of reasons.

Some of the reasons credit score drops are,

a.Missing repayments or  (DPD)

 If you miss repaying your EMIs or Delay on time bills, then your CIBIL score will take a dip. Lenders might consider profiles to be too risky to lend funds to and reject their application. It is important to pay your dues on time to maintain a good credit score.

What is DPD in a Credit Report?

In a credit report, there is a section available under Credit Information Details called Days Past Due (DPD), it is the number of days by which the borrower has missed the payment. DPD helps gauge borrowers’ creditworthiness. Lenders can access borrowers’ DPD for upto 36 months. If you have prudently paid off all the dues within time, DPD will be 000 days. If the DPD is high, the loan application is summarily rejected.

Suggested Read – Understanding DPD in CIBIL Report

b.Multiple Hard inquiries

If you aggressively apply for too many loans at the same time, the lenders will cross verify with the credit bureaus and every time a company logins in the credit bureau portal to verify your CIBIL score, it is counted as hard inquiry. Too many hard inquiries within a short span of time will cause a credit score reduction.

c.Having Multiple Credit Products

If you have too many existing loan commitments and you still go ahead and apply for the loan, the bank will reject your application.

The FOIR Metric – (Fixed Obligation to Income Ratio)

What is FOIR and what are its implications on credit score?

FOIR is a metric used by lender to decide a borrower’s ability to repay the loan. It is derived at by dividing the borrower’s fixed income to his gross income. Ideally, FOIR must be within 40% to 50% in order for the banks to sanction the loan. FOIR takes into account the entire fixed obligation that a person must meet apart from statutory expenses like tax deductions, Provident fund, investment deductions or professional tax. Additional expenses like rent are also taken for FOIR calculation.

FOIR = (Sum of All Existing Obligations/Net Monthly Salary) * 100

A low FOIR indicates a strong financial position and can help you get loan approval with favorable terms.

For example, Ashish earns a monthly salary of Rs. 30000 and has an ongoing Bike Loan Installment of Rs. 4000 and an house EMI of Rs. 15000, in that case his FOIR ratio will be calculated as follows

FOIR = (15000 + 4000)/30000 * 100 = 63.3%

You can see his FOIR is higher than the expected 50%, so his personal loan application would be rejected. Maintaining 30% is good for approval.

2.Unstable Employment

 Having an unstable employment history or frequently changing jobs can be a red flag for lenders. They prefer borrowers with a stable job history as it indicates a consistent source of income. Frequent job changes or gaps in employment may lead to loan rejection as it casts a doubt in the mind of lenders about your repaying ability

3.Incomplete or Inaccurate Documentation

Submitting incomplete or inaccurate documentation can lead to loan rejections. Lenders require specific documents to assess your financial situation accurately. Any discrepancies or missing information can result in your application being denied. It’s crucial to provide all requested documents in a clear and accurate manner.

4.Insufficient Source of Income

A steady source of income is a proof for the lender that you are capable of repaying your personal loan. Every bank has fixed a monthly or annual income requirement in order to be eligible for a personal loan. If you fail to meet this minimum income requirement, your personal loan application may get rejected.

How to avoid Personal  Loan Rejection?

Avoiding personal loan rejection requires careful preparation and understanding of the factors that lenders consider before approving a loan. Here are some steps you can take to increase your chances of approval:

Check your credit report –  Obtain a copy of your credit report from a major credit bureau (you can get free credit report from Fincover) and review it for errors or discrepancies. Dispute any inaccuracies and work on improving your credit score if it’s low.

Maintain a good credit score – Pay your bills on time, reduce credit card balances, and avoid having multiple loans at a time, these habits would boost your credit score. A higher credit score makes you eligible for  preapproved loan offers

Choose the right lender – Research different lenders and their eligibility criteria. Each lender has a specific eligibility criteria, you will have to pick the one that fits your requirement the most. Applying to the right lender can improve your chances of approval.

Assess your debt-to-income ratio – Lenders consider your debt-to-income (DTI) ratio when evaluating loan applications. Aim to keep your DTI below 40%, as a lower ratio indicates that you have more disposable income to repay the loan.

Provide accurate information – Be very careful while filling loan application with accurate and complete information. Inaccuracies or omissions can lead to rejection.

Have a stable employment and income history – Lenders prefer borrowers with a steady job history and a stable source of income. It is important you do not frequently jump jobs as it gives an unfavourable impression about you. Normally, a lender expects a potential borrower to have worked in the current company atleast for a year in order to sanction the loan.

Apply with a co-signer – If your credit score is too low to apply for a loan, consider applying through a trusted friend or a family member with a strong credit record as a co-applicant for a loan. This can increase your chances of personal loan approval as the co-signer is responsible for the loan repayment

There are some of the reasons through which you can avoid personal loan rejection. Though, there is no silver buller solution for personal loan approval. Each lender have their own set of underwriting criteria for personal loan approval. However, by following these steps, you can significantly improve your chances of avoiding personal loan rejection.

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