A personal loan is one of the most popular forms of loan as it doesn’t need collateral and the terms of the loan are also quite flexible. It has also become much easier to fill out an online loan application and get instant approval. However, you must meet the eligibility criteria to get your loan application approved without much hassle. Otherwise, you can get rejected for your loan application just as easily. Especially when you apply for multiple loans, too many hard inquiries can hamper your credit score.
Here are the top reasons why your personal loan application might be getting rejected.
A low credit score is the most common reason for rejections when it comes to personal loan. Lenders consider your credit score to be an indicator of your creditworthiness when reviewing loan applications. A low credit score may create an impression that you have a history of late or missed payments, high credit card balances, or other financial issues that make you a high-risk borrower. To avoid the chances of default, the lender may reject your loan application altogether.
Also read: Are you creditworthy? Let’s check.
As there is no collateral involved, lenders have to ensure that you have sufficient income to cover the EMIs before approving your loan application. While some lenders have minimum salary criteria, most look at your debt-to-income (DTI) ratio to determine your eligibility. The lower the DTI ratio, the better your chances of getting approved for this loan.
Even the smallest of errors in your personal loan application form can lead to the rejection of your loan. Similarly, incomplete information on your loan application can raise red flags for lenders. Your creditworthiness is dependent on several factors like your credit score, personal details, income information, employment history, or financial statements. If the lender finds any inconsistencies or discrepancies in these details, it can result in the rejection of your loan application.
Submitting incomplete paperwork can delay the loan processing and jeopardize your loan application. Lenders assess your financial situation through factors including income, assets, and debts, to evaluate your ability to repay the loan. Failure to provide necessary documents or any supporting paperwork can lead to loan rejection.
Applying for multiple loans or credit cards in a short period can make you appear credit-hungry. It can indicate that you are in a financial crisis and are seeking credit to cover your expenses. This can be a red flag for lenders, and they may reject your loan application as a result.
Lenders prefer borrowers who have a stable and reliable income. If you have a history of changing jobs often, being unemployed for a long period, or having an irregular income, the lender may question your ability to repay the loan. The lender may also hesitate to approve the loan if you work in a volatile industry or if you are on a probationary period at a new job. However, It's important to note that the specific criteria and policies vary among lenders, and not all lenders may have strict restrictions on job instability.
Lenders may hesitate to approve loans for individuals nearing retirement age or already retired because they may have a limited income and a shorter timeframe to repay the loan. They want to make sure borrowers can keep up with the loan payments until it's fully repaid.
But not all lenders have strict age restrictions, and the rules can vary depending on where you live and the type of loan you're applying for.
Also read: 5 common loan application mistakes
There are several reasons why your loan application may be getting rejected. To improve your chances of loan approval:
Lenders send an adverse action notice which enlists the reason(s) behind the rejection within 30 days of rejecting an application. You can understand the reasons behind the rejection and work on that factor before the next application.
Yes, you can. However, consider waiting for at least 6 months before applying for a loan again. Identify the factors that led to the rejection and try to improve it before the next application.
Yes, your credit score can get affected severely if your loan application gets rejected.
Maintain a good credit score (750 & above), keep the required documents handy, and ensure you don’t apply for too many credit products in a short time.
To stay in charge of your credit accounts, download OneScore.
- OneScore , June 06, 2023