Introduction

Personal loans are unsecured loans typically used to meet immediate financial needs. An unsecured Loan does not require collateral or mortgage to avail of it either with banks or digital lending platforms.  Since no collateral is required, banks levy higher interest rates to mitigate risk of default.

Being a good option for convenient and hassle free monetary help online, personal loans are granted based on your credit worthiness. Your employment status and income help determine if you are capable of paying the EMIs on time. The personal loan amount along with interest rate is calculated for the entire tenure and in case you want to clear off the loan before tenure completion, a prepayment penalty is levied. The repayment tenure could range between 12 to 60 months, depending upon the bank. Personal loans can be taken for international holidays, purchase gold, marriage or weddings, home renovation, medical emergencies, purchasing of a laptop or smartphone etc.

Whatever your reasons for a personal loan, it is possible that your request for a loan could be rejected. Personal loan rejection is taken more negatively compared to secured loans by credit score bureaus. Let us look at 4 reasons why banks could reject your personal loan application.

1. Poor credit history

Default on any previous or concurrent loan EMIs, credit card payment defaults or if you have never availed a loan before could lead to poor credt history.

Credit bureaus maintain your credit history provided by banks or credit card companies. When you apply for a personal loan at a bank, your credit history report along with a credit bureau score is sent to the bank who reviews it before taking the call on approving or rejecting your loan application. A higher credit bureau score is preferred.

Banks also look at how long it’s been since you last defaulted. For example if you failed to make a credit card bill payment on time around 6 years ago, then that is okay compared to a default 3 months ago.

If you have never availed a loan before the bank has no indication of your  past loan repayment behavior.

Applying for multiple credit cards or personal loans at different banks within a short period of time and getting subsequent rejections suggest that you are desperate for cash and this will reflect on your credit bureau report.

To ensure you don’t face rejection due to poor credit history, always pay your loan EMIs or credit card bills on time. Do not fully utilize your credit limit, using up to around 70%. Also ensure you do not spend over the credit limit.  Monitor loan EMI status in case you are a co-applicant or loan guarantor.

2. Job profile and monthly income

If your monthly income is insufficient for monthly EMI repayments, banks could reject your loan request. Bank eligibility criteria usually need you to have a minimum income to be eligible for the personal loan.

Before you apply, know what the bank’s minimum monthly income threshold is, and do not apply if your monthly salary falls short of the bank’s minimum income threshold.

A stable job is what they look for in a personal loan applicant. The minimum expectations banks have are between 6 months to 2 years in the same organization. Unstable employment or insufficient employment history can make banks doubt your repayment capacity. The probability of rejection is high if you are a temporary employee or on probation.

Banks also look at what industry you are employed in. In case you are associated with an industry that is going through recession or continuous layoffs, banks might reject your application.

3. Multiple concurrent loans

Make sure you are not currently paying multiple EMIs towards multiple loans. This can be a good reason for bank rejections towards your application. If these multiple loans indicate you being in debt, then it is easy for the bank to reject your application.  Banks want to you have enough balance in your account to spend towards daily expenses, utility recharges etc. Pay off the loans you already have before applying for a new one.

The total amount of EMIs being paid each month should be less than 50% of your monthly income. There is not defined maximum number of loan EMIs that a bank dictates but most banks might be less willing to offer a loan if you already pay more than 2 to 3 loan EMIs each month.

4. Required loan amount

Before you apply for a personal loan you should access your requirement carefully. If your need for funds is small then try to arrange from non-banking sources. Generally if you are applying for a personal loan as low as Rs.25,000 then it will be rejected. The assumption is that your financial situation must be under severe stress for you to need such a loan. The bank will also doubt your repayment capability.

Contact the bank maybe via email or their customer care to first know what the least available loan amount is before applying.

Some less likely reasons that lead to rejections 

Bounced cheques, insufficient average daily balance, non-crediting of salary on time each month are some other typical loan rejection reasons.  But you could have your loan request rejected if

• Your residential address is on the defaulter’s list if you live under the same address as someone who has defaulted on a loan EMI payment (could be a family member or previous tenant)
• You are a loan guarantor to someone who has defaulted in a loan EMI payment
• The co-applicant to your personal loan has a poor credit bureau record even if your credit score is good
• You faced loan rejections prior to your current loan application

Increase your chances for personal loan approval by not having multiple loans at the same time, being prompt with payments and keeping your credit score healthy.

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