A personal loan is the most preferred financing option by many as it does not require any collateral and can be used in multiple ways. However, a personal loan application may get rejected for several reasons. Rejection of a loan application does not mean you will never get a loan in the future. By focusing on specific aspects, you can improve your chances of getting a personal loan.
Before knowing how to improve your chances of getting a personal loan, it is important to know the reasons why your loan application would get rejected.
Poor credit score: A credit score depicts a borrower’s creditworthiness. A low credit score shows that you are an unreliable borrower. Every lender has a specific credit score to determine eligibility for a personal loan.
Unsteady source of income: An unstable job or source of income suggests that the borrower might not be able to repay the loan on time, and therefore, the personal loan application is rejected.
Low income: Every lender may have minimum income requirements to approve a personal loan; this criterion may differ from bank to bank. An income lower than the eligibility criteria may lead to the rejection of a loan application.
High debt-to-income ratio: The debt-to-income ratio shows the portion of your income that goes into debt payments. Having a higher debt-to-income ratio shows that a major portion of your income goes toward debt payments. This reduces your chances of getting a new loan, as a new loan will add to your existing debt payments.
Errors in credit report: Your loan might get rejected if there is any mistake in your credit report as it lowers credit score.
What do you do if your personal loan application is rejected?
Know the cause: Before taking measures to improve your loan eligibility, it is important to know the reason why your loan application is rejected. This will help you address the root cause for rejection of your loan application. Factors such as low income, poor credit score, and existing debts might play a key role in loan rejection.
Improve credit score: One reason your personal loan application is rejected is your poor credit score. A good credit score shows a borrower’s creditworthiness. Try to maintain a high credit score by paying existing debt on time, limiting hard inquiries, etc.
Verify credit report: Make sure to monitor your credit report diligently as any wrong information in your credit report may lead to loan rejection. Look for errors in your credit report and get them rectified by your credit bureau by providing them with enough evidence regarding the errors.
Maintain debt-to-income ratio: Improve your chances of approval of a personal loan application by trying to keep your debt-to-income ratio low by paying off existing debt on time, cutting down on expenses, and having additional sources of income.
Debt payments: If you have existing debt already, make sure to be punctual with EMI payments. This will show lenders your creditworthiness and give them the confidence to lend money.
Additional income: To improve your chances of loan application approval, try to look for other sources of income to meet the minimum eligibility requirements of various lenders. Apart from improving the chances of loan approval, this will also help to make EMI payments conveniently and on time.
In a nutshell, some people apply for a personal loan to get emergency funds. Even if you are not applying for a personal loan, try to maintain a good credit profile by maintaining a good credit score, timely EMI payments, accurate credit reports, etc., even if you are not. This will help you avail of a loan in times of emergencies, as improving your personal loan eligibility metrics will require some time.
