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Introduction
A personal loan application can be rejected for several reasons, even if you have a stable income and meet the basic eligibility requirements. Understanding the most common rejection triggers can help you improve your profile, avoid unnecessary credit inquiries, and increase your chances of approval.
Before submitting your application, it is important to know what lenders typically look for and the steps you can take to strengthen your loan eligibility.
Top 5 Reasons Personal Loan Applications Get Rejected
The following table highlights the most common reasons for rejection and practical ways to address them.
| Rejection Reason | Why It Matters | Quick Fix |
|---|---|---|
| Low Credit Score | Indicates past repayment issues or limited creditworthiness. | Improve your credit score by making timely payments and reducing outstanding debt. |
| High FOIR (Fixed Obligation to Income Ratio) | A high percentage of income already committed to EMIs may indicate repayment stress. | Reduce existing debt or opt for a lower loan amount. |
| High Credit Utilisation Ratio | Excessive use of available credit may signal financial dependence on borrowing. | Keep credit card utilisation below 30% of the total limit. |
| Multiple Recent Loan Applications | Numerous applications within a short period may indicate credit dependency. | Apply selectively and avoid submitting applications to multiple lenders simultaneously. |
| Inaccurate or Incomplete Information | Mismatches in documents or application details may lead to verification failures. | Review all information carefully and provide accurate documentation. |
Reasons Personal Loan Applications Get Rejected
1. Low Credit Score
A low credit score is one of the most common reasons for personal loan rejection. Lenders use credit scores to evaluate repayment behaviour and creditworthiness.
Quick Fix: Pay all EMIs and credit card dues on time and avoid missed payments.
2. High FOIR (Fixed Obligation to Income Ratio)
FOIR measures the proportion of your monthly income that is already committed toward existing loan repayments and financial obligations.
Quick Fix: Reduce outstanding debt or consider applying for a lower loan amount.
3. High Credit Utilisation Ratio
Using a large percentage of your available credit limit may indicate financial stress and can negatively affect your credit profile.
Quick Fix: Maintain credit utilisation below 30% of your total available credit limit.
4. Multiple Loan Applications in a Short Period
Applying to several lenders simultaneously can create the impression that you are actively seeking credit due to financial difficulties.
Quick Fix: Research eligibility requirements beforehand and apply only to lenders where you are likely to qualify.
5. Incorrect or Misrepresented Information
Providing inaccurate employment details, income figures, addresses, or supporting documents can lead to immediate rejection during verification.
Quick Fix: Double-check all application details and ensure supporting documents match the information submitted.
CIBIL Score Benchmark for Personal Loan Approval
While approval criteria differ across lenders, the following ranges can serve as a general benchmark:
| CIBIL Score Range | Typical Impact on Loan Approval |
|---|---|
| 750 and Above | Generally considered strong and may improve approval chances and loan terms. |
| 700 – 749 | Often acceptable for many lenders, subject to other eligibility criteria. |
| 650 – 699 | Approval may be possible but could involve stricter evaluation or higher interest rates. |
| Below 650 | May reduce approval chances significantly. |
It is important to note that a credit score alone does not determine approval. Lenders also assess income, existing obligations, employment stability, and overall financial profile.
How to Check and Improve Your Credit Score
How to Check Your Credit Score
- Obtain your credit report from an authorised credit bureau.
- Review the report for inaccuracies or outdated information.
- Monitor your score periodically, especially before applying for a loan.
How to Improve Your Credit Score
- Pay all EMIs and credit card bills on or before the due date.
- Maintain low credit utilisation.
- Avoid defaulting on existing loans.
- Keep older credit accounts active where appropriate.
- Correct errors in your credit report promptly.
- Avoid applying for multiple credit products within a short period.
Hard vs Soft Credit Inquiries
Many borrowers assume that applying to several lenders increases their chances of approval. In reality, multiple applications can sometimes have the opposite effect.
What is a Hard Inquiry?
A hard inquiry occurs when a lender reviews your credit report as part of a loan or credit card application.
Examples include:
- Personal loan applications
- Credit card applications
- Auto loan applications
Multiple hard enquiries within a short period may affect your credit profile and can signal higher credit dependency to lenders.
What is a Soft Inquiry?
A soft inquiry does not impact your credit score.
Examples include:
- Checking your own credit score
- Pre-approved offer checks
- Eligibility checks that do not involve a formal application
Before submitting multiple applications, it is advisable to compare eligibility criteria and use pre-qualification tools where available.
Self-Check Checklist Before Applying
Before submitting your personal loan application, review the following checklist:
Credit Profile
- Credit score is within an acceptable range
- No recent missed EMI or credit card payments
- Credit utilisation is below 30%
Existing Debt
- Current EMIs are manageable
- FOIR is within a comfortable range
- No unnecessary outstanding debt
Application Details
- Personal information is accurate
- Documents are updated and valid
- Income details match supporting documents
Application Strategy
- Not applying to multiple lenders simultaneously
- Researched lender eligibility criteria
- Selected a loan amount aligned with repayment capacity
Dos
- Maintain good FOIR (Fixed Obligation to Income Ratio) Most banks consider the net monthly income of the individual before processing the loan application. This parameter is evaluated using FOIR, which is fixed monthly liabilities divided by the net monthly income.In order to get through with the loan, your FOIR should be 40-50%. As this also includes your prospective EMI for the loan, it is advisable to opt for a longer loan duration, thereby reducing the EMI and eventually improving your FOIR scores.
- Ensure timely repayments: No lender prefers a repeated defaulter to be their loan applicant. Hence, it is essential to maintain your track record by making repayments on time for the existing credit card bills or loan EMIs if any.
- Lower credit utilisation ratio: Another determinant that needs to be followed religiously is to keep your credit utilisation ratio under 30%. This ratio is the percentage amount of your total credit card limit. Most financial institutions hold the 30% limit as the ideal limit, and anything above it is an indicator of credit hungriness, which can reduce your credit score.
Don’ts
- Do not forge your application data: It is always important to not hide or misrepresent any personal information no matter how trivial it is. Most banks use third-party agencies to check up on the information provided in the loan application. Even though the CIBIL score may make you eligible for a loan, the application is approved only after proper scrutiny.
- Avoid taking multiple loans: It is always better to stir away from applying for or even taking multiple loans to pay off the previous ones. Such a move has the potential to throw you into a debt trap and eventually affecting your credit score adversely.
- Avoid constant credit enquiries: You should always avoid enquires on direct loans or even credit card as these are considered hard enquiries and may lower your credit score. However, online enquiries are not considered in the same light and do not have an impact on the creditworthiness of your potential loan.
- Do not change jobs frequently: Job stability is also an important parameter, which is why switching jobs frequently is a big no if you are looking for a personal loan.
So, next time you apply for a personal loan do check on all the aforementioned points to self-evaluate yourself.
Conclusion
Personal loan rejections are often preventable when borrowers understand the factors lenders evaluate during the approval process. Maintaining a healthy credit score, managing existing debt responsibly, avoiding excessive credit applications, and submitting accurate documentation can significantly improve approval chances.
Before applying, take the time to review your financial profile using the checklist above and address any potential red flags that may affect your application.
Check your eligibility with ABC before applying.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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