Personal loans are a way to resolve financial problems and immediate need of cash. It is easy to apply for, and you do not even have to submit a security to avail the funds. Also, you are allowed to use the funds as you require for any purpose. But, as good as a personal loan scheme may seem to be, it does have its share of strict restrictions as to pick only suitable borrowers. Since the loan is free of collateral, the eligibility criteria are strict, and stringent checks are undertaken before the loan application is approved.
Below-listed is a brief overview on factors keep in mind so as to avoid rejection of your personal loan application:
- Credit History and Score:
To avail a personal loan, you must have a good credit score. Financial institutions usually expect CIBIL score 750+ to provide the loan. So, it is best to find out about the credit score requirement by a particular bank or NBFC before applying with it, as it will make you aware about the expected credit score. A poor credit score makes it difficult to get a loan approved, but there are a few financial institutions offering loans on high interest rate to such individuals.
- Purpose of the Loan:
Most of the personal loan schemes allow you to use the funds for any purpose. But certain schemes are purpose-driven. Thus, check with the financial institution about the end-use of funds. For instance, a personal loan for doctors can be used for specific medical upgrades required by the borrower. Perhaps the funds can be only used to set up a clinic, purchase equipment, or hire staff, etc. Similarly, there could be special personal loans for agriculture, women, etc.
- Employment Status:
Personal loans are usually offered only to salaried individuals. However, a few schemes could be allotted to self-employed professionals such as lawyers, doctors, Chartered Accountants, consultants, etc. Check with the bank about a scheme that meets the criteria of your employment type. Also, know how much work experience is required. A few financial institutions provide loans to people with 1 year of work experience, but many ask for at least 2 years working experience, the recent 1 year being employed with the current employer.
- Monthly Income:
Find out the minimum income criteria by financial institutions and apply with the one that is the perfect fit. For instance, if you apply with a bank which has proposed minimum monthly income of the applicant as Rs. 30,000 but you draw Rs. 25,000, then your personal loan application will get rejected. But if you apply with a bank, whose income criteria you meet, you stand a better chance at loan approval.
- Repayment Capacity:
Your debt-to-income ratio is considered to approve or reject the loan application. The debt-to-income ratio signifies how much disposable income you are left with in a month after paying for the ongoing EMIs, insurance premiums, and fulfilling other financial liabilities. Your loan amount eligibility depends on this disposable income. It should be at least 35% to 40% of your monthly income. If the bank finds that you can manage the monthly EMIs, it will approve the loan, or vice-versa.
Though personal loans are unsecured in nature, there are a few schemes where minimum collateral is required. This collateral could be a piece of real estate property, bond or share, and other investment with the bank, etc. So, if you are applying for a secured personal loan, then look into the criteria for acceptable collateral.
- Verify Details in the Loan Application:
While filling details in the loan application make sure you mention only the accurate information. Do not miss any detail that is marked as essential. Double-check all the filled information before submitting the application. If the lender finds any false details after verification, then legal action can take place. Also, if you miss providing necessary details and information, it will lead to rejection of you loan application.
Things to Consider Before Applying for a Personal Loan
Below-mentioned are some of the factors to keep in mind before making a personal loan application:
- Keep Your Credit History Spotless: Make sure to pay the ongoing EMIs on time. Avoid loan defaults, and pay at least the minimum due on credit card bill, even if you cannot pay it in complete. Regular payments towards loans and bills will help increase your credit score and keep your credit history clean, convincing banks to approve your personal loan application.
- Limit the Enquiries: When you apply for a loan, each application is considered as an inquiry in your credit report. If there are too many inquiries, then it can affect your credit score negatively, which can cause rejection of your loan application. Thus, limit your loan applications at a time.
- Monitor Your Credit Report: Keep a check on your credit report, and make sure there are no errors, as it may affect your credit score negatively otherwise. Fix any error or inconsistency in the credit report before you apply for the loan.
Why Banks and NBFCs May Reject Your Loan Application?
Below-mentioned are some of the reasons why financial institutions may reject your loan application.
- Too Many Ongoing Loans: If you have several ongoing loans, then banks and NBFCs may not immediately approve your loan application. Even if your application is approved, you should not expect a high loan amount, or a standard rate of interest.
- Multiple Late Payments: If you have defaulted on a recent loan, then your loan application will be rejected. This holds true even if you miss or delay paying credit card bills.
- Unstable Job: If you are the one who hops workplaces often, then it signifies that you lack stability in job. To make regular payments towards a loan, you must draw a regular income, and job instability may prompt financial institutions to disapprove your loan request.
- Your Age: If you apply for a loan when nearing retirement, the disapproval of loan application could be higher. This may aggravate if you have unstable job with insufficient income. However, there are banks which offer loans on pension and collateral as well, and in such a scenario, you may look out for such options.
Approval of your personal loan application depends on how perfect a fit you are to the financial institution’s eligibility criteria set for the loan. Sometimes, meeting the minimum requirements may not be enough as the lender may want a higher trust factor established to provide funds. But, before applying for the loan, you should keep in mind the above-mentioned factors. This will help you to be better prepared when dropping a personal loan application.