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Personal loans are one of the best loan options to meet our immediate requirements of cash. Personal loans are the most flexible loan option as firstly, they do not require any collateral and secondly, the loan proceeds can be used for any personal requirements. However, this flexibility comes at the cost of a relatively higher interest rate as well as the stringent credit appraisal process. As the loan is unsecured, banks use a more strict credit appraisal criteria in approving a loan application. As a borrower, you need to understand the common reasons for rejection of personal loans and be watchful of these factors to reduce the chances of personal loan application rejection.
- Poor credit score: All banks and finance companies check customer credit score rates to evaluate the creditworthiness of the customer. Since a personal loan is a security free loan, the lenders rely on your credit score to make a decision to lend or not. Leading banks in India will approve your loan, only if you have a CIBIL score of 700 and above. Make sure to pay all credit bills and EMIs on time to maintain a good credit score and reduce the chances of rejection of your personal loan.
- Inadequate Eligibility: Lenders analyze your monthly income to see if you will be able to repay your loan. You would also be required to submit income documents to establish your income eligibility. Your application is most likely to be rejected if you do not meet the income requirements of the lender. Calculating your loan amount eligibility and applying for a loan amount you are likely to be eligible for can improve your chances of getting a loan.
- Occupation: The rate of interest offered to you depends on your designation and company profile for salaried borrowers. Bigger and reputed the company you work for, better are the chances to get loan approved. Self-employed applicants, on the other hand, are required to submit separate income documents like the profit and loss account, ITRs and other documents. Banks consider occupation and business continuity as an important criterion to judge your repayment capacity and unstable work history can affect your approval chances negatively.
- Mistakes in the application form: It is common to make errors while filling the application form. Small errors and slippages such as missing crucial information, entering wrong details, etc. can result in a rejected loan application. Similarly, it is important to monitor your credit score and report for any reporting errors to get them corrected immediately as it can result in your loan application rejection.
- Multiple inquiries: A section of credit report highlights all loan queries by the prospective borrower. Multiple and parallel credit queries within a short period of time can further increase chances of loan application rejection as it reflects the desperation to get a loan as well as your inability to get a loan from other banks.
- Age: Personal loans are generally given to people from a certain age group, which is mostly 21 to 60 years of age. If you are too young or too old, the chances of a personal loan application being declined are higher. Moreover, they are generally offered to customers who have a regular source of income.
- High loan balances: Your application is most likely to be rejected if you haven’t been paying down your loan balances or you’re using too much of your available credit. Reducing your loan balances and using only a portion of the credit available to you can help you get approved.
- Unsecured Loans: Ratio of secured and unsecured loans matter a lot when you apply for a personal loan. A higher number of current unsecured loans as compared to secured loans reduces the chances of your personal loan application approval.
A credit score is no doubt the most important parameter, used by banks in taking a decision to provide personal loans. However, banks also consider other factors such as education background, job continuity, age, residence stability, etc. before taking a final decision to lend. To improve your chances of getting a personal loan, it helps to pay your dues on time, maintain a good credit score and submit your loan application with adequate care.