Top 5 reasons your personal loan application might be rejected

Personal loans are a convenient way for borrowers to cover day-to-day expenses, such as home renovations, holiday celebrations, and educational costs. They address individuals' urgent cash needs. The benefit of personal loans is that they come with minimal documentation, quick disbursal, and the feature of submitting applications online.

Still, it has been observed repeatedly that personal loan applications of individuals are declined or rejected for various reasons. This makes it essential to clearly understand the minimum requirements, eligibility criteria, and must-haves to complete and secure a personal loan.

Keeping the above in mind, here are five common reasons for the rejection of a personal loan application:

I. Credit and income factors

• Low credit score: Lending institutions generally prefer applicants to have a credit score of 750 or more. Such a score helps facilitate the rapid clearance of new personal loans, credit cards, and home loans. Now, when borrowers are unable to achieve such high credit scores, it complicates their borrowing experience, and their applications are often rejected.
• Not meeting income criteria: Several lending institutions have minimum income thresholds. These can be a minimum salary of ₹25,000 or ₹30,000 per month, or several other checks to ensure that money, i.e., loans, are granted to able and worthy borrowers only. That is why applications are rejected in cases where borrowers fail to meet basic eligibility criteria.

II. Employment and debt considerations

• Unstable employment history: If you are someone who frequently changes jobs, leaves assignments in the middle with shorter tenures, then this reflects very poorly on your credit profile. Due to such behaviour, several lenders reject loan applications.
• High existing debt: A very high debt-to-income ratio, resulting from pending obligations, multiple credit card or personal loan payments, can also result in the rejection of personal loan applications.

III. Documentation and application issues

• Incomplete or incorrect documentation: Incorrectly filled documents, such as common mistakes in name spellings or incorrect PAN or Aadhaar details, can result in the rejection of personal loan applications. Lenders simply reject applications in cases of doubt or uncertainty regarding the borrower's identity.
• Sending many loan applications: When you submit many personal loan applications with different banks within a short span of time, this results in a hard inquiry and is looked down upon by lending institutions.

IV. Age and eligibility restrictions

• Eligibility restrictions: Banks and lending institutions often impose minimum and maximum age limits and bars. Along with nationality or restrictions, that if not net can result in automatic rejection of personal loan applications.

V. Limited or thin credit history

• Borrowers with an insufficient credit history: Such individuals often struggle to establish a credit profile and demonstrate solid creditworthiness. This can result in the denial of the application.

In summary, maintaining a good credit score, a stable job, and consistency in income, and managing debt boosts your chances of personal loan. Still, before proceeding with any new loan or credit card, understand the risks involved.

Improper management of a personal loan can result in a rise in debt, damage to a credit score, forced asset liquidation (if pledged), and legal trouble. Therefore, borrow only after conducting thorough due diligence.

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Disclaimer: Mint has a partnership with fintech companies to offer credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article aims to educate readers and raise awareness about the essential needs for credit, including loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.