In personal loans, there is no underlying asset as security/collateral to help lenders recoup their losses in case of loan default. This increases the lending risk for banks and NBFCs, leading them to adopt a more stringent approach during loan approval process. Hence, those failing to meet the loan eligibility cut-offs set by the lenders may have their loan applications rejected.
Here are some of the reasons due to which personal loan lenders may decline your personal loan application:
Low credit score
Applicants having credit scores below 750 usually have lower prospects of getting personal loans. This is because such applicants tend to lack credit discipline and hence, are more likely to default on the loan. Therefore, when lenders receive loan applications of such individuals, they may reject them or approve at higher interest rates, depending on their risk tolerance.
To avoid such a case, those planning to avail personal loans should check their credit scores from all credit bureaus and work towards keeping them at 750 or above. Following healthy credit practices like never missing their credit card bill and EMI payments, avoiding making multiple credit card or loan applications within a short period, etc. should help them steadily build or improve their credit scores. Those without credit history can use credit cards to build their credit history.
Additionally, individuals should also check their credit reports regularly to identify any wrong information, error or fraudulent credit activity. Any misinformation or clerical errors present in the credit report should be quickly reported to the concerned lender and credit bureaus for correction. A rectified credit report may increase the applicant’s credit score, thereby, improving his chances of availing the loan at lower personal loan interest rates.
Insufficient EMI affordability
Before approving a loan application, personal loan lenders also ensure the applicant can afford to make his EMI payments. For this, they evaluate his loan repayment capacity, wherein they check how much portion of the applicant’s net monthly income goes into servicing his existing and proposed EMI obligations. Banks and NBFCs usually prefer approving personal loan applications of those having their total EMI obligations, including EMI of the proposed loan, within 50-55% of their net monthly income. Those exceeding this ratio may get their loan applications declined. To avoid this, applicants can choose longer tenures and/or lower loan amounts on their proposed loan. Doing so will reduce the EMIs of their proposed loan and may bring their total EMI obligations down within the limit of 50-55%.
Unstable employment history
Banks and NBFCs prefer sanctioning personal loans to applicants having stable employment history. Those who change their jobs frequently or have gaps in their employment history tend to have inconsistent income and are more likely to default on their loans. This increases lending risk for personal loan lenders causing them to avoid giving loans to such applicants. Therefore, personal loan lenders usually require their salaried applicants to have at least 1 to 3 years of total work experience with some lenders additionally requiring 6 months to 1 year of service experience in their current organisation. Individuals planning to apply for personal loans in the near future should avoid changing their jobs to improve their odds of availing the loan.
Multiple loan or credit applications within a short span
Every time an applicant applies for a loan, lenders fetch their credit reports from credit bureaus as part of their loan process. Such lender-initiated requests of credit reports are known as hard enquiries. With every hard enquiry initiated, credit bureaus reduce the applicant’s credit score by a few numbers. Hence, making multiple hard inquiries within a short period may sharply decline the applicant’s credit score, thus, reducing his chances of getting a personal loan. To avoid this, individuals should visit online financial marketplaces to check personal loan offers from multiple lenders. At such marketplaces, individuals can compare interest rates and other features of personal loans online and apply for the one that best suits their requirements without affecting their credit scores. This is because the credit report requests raised through such marketplaces are considered as soft inquiries, which do not influence an applicant’s credit score.
Ineligible employment profile
Applicants’ work profile is also an important factor that banks and NBFCs look into when assessing their loan applications. They usually prefer sanctioning personal loans to those working with government, public sector undertakings, MNCs and other reputed private sector companies. Personal loan lenders also prefer offering personal loans to self-employed professionals like doctors, chartered accountants, doctors and architects. However, individuals whose occupation or employer profile is not among the lenders’ list of preferred occupation/employer profiles may not get their loans approved.
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