Personal loans can be extremely helpful during emergencies or when planning expenses for your big goals. However, for some applicants, getting the loan approved can be challenging. Lenders review multiple financial factors before approvals. They also have eligibility criteria that borrowers must meet before making an online personal loan application.
Understanding the common reasons for personal loan rejections can help you prepare more effectively and improve your chances of approval.
Top 6 reasons personal loan applications may get rejected
While there are several reasons why personal loans cannot get approved, let us look at the six common reasons for loan rejection, including:
1. Low credit score: Credit scores are critical when applying for a financial product. It is what creditors evaluate in your credit profile. It gives them an accurate insight into your repayment patterns, your financial stability, and how you manage other credit products, such as loans and credit cards.
Indian lenders prefer a credit score of 700 or above. A low score could reflect missed or delayed payments, defaulting on EMIs, or high credit utilisation. Making timely payments and utilising credit up to 40% can boost your chances of approval when you apply for a personal loan online.
You can apply for a FIRSTmoney personal loan by IDFC FIRST Bank with a CIBIL score of 710 or above. Other requirements include age between 21-60 and a stable monthly income. You can apply for funds up to ₹15 lakhs and get instant disbursal in as little as 10 minutes.
2. High existing debt obligations: The debt-to-income ratio is the percentage of an individual’s monthly income spent on existing debt. Therefore, lenders see DTI as a crucial parameter. It helps them determine whether adding an additional EMI will be a financial burden on the borrower. A low DTI score is considered a low-risk indicator for a borrower. Reducing existing liabilities or maintaining a manageable debt-to-income ratio can help strengthen a personal loan application.
3. Unstable employment or irregular income: Stable income is a significant factor that lenders evaluate to review repayment capacity. Frequent job changes, employment gaps, or irregular income patterns may be perceived as a borrower’s inability to repay the personal loan. Applicants with a steady employment history and regular income are typically approved when applying for a personal loan online.
4. Incomplete documentation: Documents such as PAN details, Aadhaar card, and financial documents like salary slips and bank statements are required for a personal loan application. Missing documents may delay processing or lead to rejection. Ensuring that all submitted documents are accurate and up to date can help avoid this.
To avoid the hassle of paperwork or document uploads, opt for a 100% digital personal loan like FIRSTmoney by IDFC FIRST Bank. All you need is your PAN and Aadhaar number for application and show your original PAN card during video KYC.
5. Multiple loan applications within a short period: Submitting multiple loan applications to different lenders within a short time may trigger a hard inquiry on your credit profile. This could have a potential negative effect on your credit profile. Each loan application usually results in a credit enquiry, and multiple enquiries can indicate potential financial stress. Lenders may consider this behaviour high risk and may reject your personal loan application.
6. Poor financial behaviour: Bank statements help lenders assess the applicant’s financial patterns. It gives the lender a broad view of the borrower’s current financial status. Lenders analyse transactions to evaluate the debt-to-income ratio, salary credits, additional income from investments or businesses, spending habits and existing financial liabilities. Frequent cheque bounces, low average balances, or excessive withdrawals may raise concerns during the review of an online personal loan application.
How to reduce the chances of personal loan rejection
Applicants can take several steps to strengthen their financial profile before applying for a personal loan online:
- Monitor and try to increase your credit score
- Reduce the existing debt-to-income ratio
- Keep documentation complete and up-to-date
- Avoid multiple loan applications simultaneously
These tips can help applicants apply for a personal loan with confidence.
Wrapping it up
Before you apply for a personal loan online, it is recommended to review your eligibility and repayment capacity using digital tools. You can use a personal loan eligibility calculator and an EMI calculator to get instant estimates of the loan amount you may qualify for and the monthly instalment that fits your budget. Checking eligibility in advance helps borrowers reduce the chances of rejection when applying for a personal loan.