Quick disbursal of funds, zero restriction on end-use and no collateral requirement make personal loans an ideal borrowing option during urgent money needs. But, you would be able to avail a personal loan only when you meet bank's eligibility parameters. A bank can reject your loan application on several grounds. Here are the most common ones that you should be aware of:
Poor or no credit history: Most lenders prefer lending to borrowers with a good credit score that shows that they have repaid their loan EMIs and credit card bills in full and on time. A poor credit score shows that the borrower hasn’t been handling loans or credit cards diligently and therefore, is more likely to default in future as well. Late bill payments and skipping EMIs are some actions that may lead to build up of an unfavorable track record and thereby a low credit score also.
Additionally, those borrowers who haven’t availed any form of credit yet, such as loans or credit card, have no credit history to their name. Due to this lack of credit history, most lenders find it more risky to lend to such borrowers and therefore many borrowers may get their personal loan rejected or they may be charged higher interest rates than others.
Failure to meet eligibility criteria: Every lender has different eligibility criteria for various credit products being offered by them. These usually include minimum income and age, area of residence etc. Many personal loan applications are rejected in the very first stage due to failure to meet the basic eligibility criteria. Therefore, to avoid such disappointments after submitting your loan application, borrowers must make use of loan eligibility calculators before submitting their credit applications. These are available for free online and helps borrowers checks their eligibility before they apply for any loan or credit card.
Higher FOIR (Fixed Income to obligation ratio): Fixed income to obligation ratio (FOIR) refers to the proportion of borrower’s income already being paid out as monthly installments for fixed monthly obligation such as EMIs. Most lenders generally prefer lending to borrowers with FOIR up to a maximum of 40-50%, including the current loan application’s obligations. In case your FOIR is beyond 40-50%, chances of a rejection are high.
Unstable employment history: Many lenders hesitate in lending to borrowers with a history of frequent job hopping. Even though borrowers opt for frequent job changes for better careers and higher income, this is seen as a sign of unstable career by lenders. Therefore, such borrowers seem to be less creditworthy, especially for unsecured loans. For instance, a lender may require a condition of 3 year continuous employment with the current company to grant loan to any borrower.
Credit report errors: Errors in your credit report may hinder your chances of personal loan approval. These errors may include incorrect reporting of payments, closed accounts being still shown open etc. Mistakes around personal details like wrong address, PAN etc. can lead to a loan rejection. To avoid this, it's advised to check and review your credit report periodically so that you can spot such errors and get them rectified timely, before they harm your loan approval chances.
Improper documentation: Proper documentation is vital for the approval of your loan. Failure to submit the right documents while applying for the loan surely leads to rejection of your loan. For personal loans, you need documents like a valid identity proof, address proof, salary slips, bank statement etc. Before you submit your application to the chosen lender, make sure you have the required documents according to the lender’s requirements.
