Applying for a personal loan is easier as you must provide the basic details and submit the application online. Remember that the quick application process doesn't guarantee approval, and the chance of rejection remains. Therefore, it is crucial to understand the common reasons for personal loan rejection.

Once you have got to know why your application can be rejected, you can take the needed steps to avoid this possible rejection in the future. So, let’s find the reasons behind personal loans being rejected!

What Are The Common Reasons For Personal Loan Rejection?

Understanding the root causes of loan application rejection can help you improve your chances of getting a loan. So, let's find what common reasons for personal loan rejection are:

Lower Credit Score

Personal loans are unsecured loans as any collateral does not back them. Therefore, the credit score plays a key role in loan approval. Though credit scores can range from 300 to 900, a borrower with a higher credit score is considered more trustworthy. But, a credit score of 85 or above will be enough for the loan application. The credit score tells the lender how you will repay your debt.

When your score does not meet the lender's minimum eligibility requirements, your chances of approval decrease. So, before applying for a personal loan, remember to check the lender's minimum credit score requirements. You can also determine your credit score through various factors, including the utilization ratio, age of the oldest form of credit, and payment history. If you don't fulfill the requirements of a lender, look for an alternative option.

Higher Debt-To-Income Ratio

The high debt-to-income ratio is another personal loan rejection reason. While determining the debt-to-income ratio, the lenders consider the borrower's monthly income and compare it to the monthly debt payments. Suppose your monthly income is $4000, and you pay $1750 for overall debt payments (including mortgage, auto loan, and other debt payments). In that case, you will divide the debt payment by your total income to calculate the DRTI (debt-to-income ratio).

It will be 44%, showing that 44% of your income goes to the monthly debt. Lenders typically approve the loan applications with DTI 40% or lower for the personal loan. So, your loan application can be rejected even if you have a good credit card score but your DTI is higher.

Applicant Did Not Meet The Basic Application Requirements

If you have proved yourself to be financially eligible, but even then your application can only be accepted if you fulfill the basic application requirements. Though those basic qualifying requirements vary generally, the lenders ask for the following:

• You must be the age of majority (typically 18 or above)
• You should have a working email address, which you will provide along with the application.
• You will have to provide a permanent address along with the bank account

So, when you apply for a personal loan, ensure you can fulfill the basic requirements.

Applicant Does Not Have Steady Source Of Income

Before approving your loan, the lenders always check your ability to repay. So, if you don't have a stable job, the lender will assume you need more financial resources to pay your loan timely. Therefore, never apply for a loan if you have just switched jobs. Likewise, if you have worked with an origination over the last 2 to 3 years, it will significantly enhance your loan acceptance chances. And, if you don't have a job, you must have other sources of income, including rental income or interest payouts, which will help you make EMI payments regularly.

Incorrect Or Incomplete Application

The loan application can only be accepted if you have submitted the incomplete or filled it correctly. Along with the application, you must submit other supporting documents, including tax returns or bank statements. It helps the lender to make the decision. So, if any document is missing or your application is incomplete, how can they make the right decision? Therefore, read the loan application guidelines before applying and provide the needed documents accordingly. Also, before applying, it is crucial to read everything carefully to catch errors and ensure you have submitted the correct materials before sending the application.

Multiple Pending Loans

Having multiple pending loans or applying for so many loans at a time can be a reason for your rejection. Before making any decision, the lenders access your credit reports, and multiple pending loans indicate the financial strains and make you a weak candidate. Remember that every loan application starts a strict inquiry on your credit report, which lowers the credit score significantly. So, if you want to improve your chances of approval, then you must prioritize your loan applications and pay off your existing loans before getting the new ones. Remember that a healthy credit profile can boost your overall financial credibility.

How To Improve Your Chances Of Getting Approved For Personal Loan?

Here is how you can improve your chances of getting approved for a personal loan:

1. Build your credit score and improve your DTI before applying for the loan
2. Always choose a realistic loan amount
3. Prequalify for the loan to get an idea of whether you fulfill the criteria of the lender
4. Always pay your existing debts like credit card bills before applying for personal loans
5. You can show the additional income sources, including the variable pay and quarterly incentives to combat the low-income
6. Always select a lender who has simple eligibility criteria
7. You can also apply for a loan jointly with any of your family members (with higher income)

Conclusion:

Personal loan rejection is common, and many have faced it at least once. So, if you want to boost the chances of acceptance and avoid the common reasons for personal loan rejection, apply for a loan with a lower DTI and higher credit score. Besides that, always read the guidelines before applying and submit a complete application with requirement documents. Only apply for a personal loan if you have a stable job or have yet to apply for any other loan.