10 Common Personal Loan Application Mistakes to Avoid

A Personal Loan is one of the best ways to fulfil short-term financial requirements, be it a wedding, home improvement, vacation, or consolidation of debts. However, it may not always be that simple to get your application approved. Even the smallest mistake can result in delayed approval or rejection.

You might have a question: What are those mistakes that can lead to rejection of your application? Most Personal Loan rejections happen due to simple and preventable errors. Knowing them in advance will help you go through the process smoothly and get your Personal Loan sanctioned much quicker and easily.

In this blog post, we will explore the 10 common mistakes to avoid while applying for a Personal Loan.

10 Common Mistakes to Avoid While Applying for a Personal Loan

Here are 10 common pitfalls of personal loans to avoid and points to consider before applying.

1. Not Checking Your Credit Score First

This is one of the top mistakes to avoid while applying for a Personal Loan. Your credit score is often the first thing lenders check when deciding whether to approve your loan. A low score will either lead to rejection or a higher interest rate.

Your credit score tells the lender if you've been a responsible borrower in the past. A score above 750 generally increases your approval chances.

What to do instead:

• Check your score from a trusted credit bureau like CIBIL, Experian, or any other before applying for a Personal Loan.
• If it is low, take measures to improve it by paying credit card and other bills on time, and avoid multiple credit applications simultaneously.

2. Borrowing Without Comparing Different Lenders

Usually, borrowers get the loan from the first lender they find, without researching and looking for better interest rates, terms, or incentives. Even a small difference in interest rate makes a big difference in your repayment amount over a long period of time.

What to do instead:

• Compare multiple lenders for processing fees, interest rates, repayment flexibility, and prepayment fees.
• Use a Personal Loan EMI calculator to see how different interest rates and tenures affect your personal loan before you apply.

3. Borrowing More Than Your Ability to Repay

Borrowing more than you can afford is another big mistake you must avoid when applying for a Personal Loan. It may be tempting to apply for the maximum loan amount that you are eligible for, but you must be cautious.

A bigger EMI could be a strain on your monthly cash flow and result in delayed repayments. Overborrowing increases your debt burden and affects your credit score if you are unable to pay on time.

What to do instead:

• Borrow the amount of money that you need.
• Check your monthly income and fixed expenses before taking on new debt.

4. Providing Incorrect or Incomplete Information

Even a small mismatch in your name, address, or employment details in your application and documents can cause approval delays or application rejections. Lenders review every minor detail before approving your loan. Discrepancy in documentation will arouse suspicion.

What to do instead:

• Verify all personal, employment, and bank information before providing it to the lender.
• Make sure documents such as ID proof, address proof, and salary slips are recent and match the information you provide.

5. Not Reading the Terms and Conditions

Most borrowers care only about interest rates and do not go through other terms. Reading the loan agreement helps you to know about processing fees, foreclosure charges, late payment charges, and prepayment conditions. Hidden charges have the potential to turn the loan into a much more costly endeavour than you may have imagined at the time of application.

What to do instead:

• Carefully read the loan agreement before signing.
• Get clarity about all the fees and charges from the lender.
• Find lenders with no prepayment or foreclosure costs if you intend to prepay your loan early.

6. Applying With Multiple Lenders at the Same Time

Taking multiple loans from different lenders over a short period negatively affects your credit score, as each of them will make a hard inquiry against your credit report. Having too many credit checks makes you look desperate and can lower your chances of getting approved.

What to do instead:

• Shortlist lenders after researching and consider only one or two applications.
• If you are comparing loan options, consider applying directly on lenders’ websites. You can even use eligibility tools that perform soft checks, as these will not impact your credit score.

7. Not Having Stable Employment or Income Proof

The lender needs to get the assurance that you'll be able to repay the loan. Changing jobs frequently or having huge gaps between jobs might lead to rejection of your application. When you have no stable income, lenders will either reject your application or offer you a loan at a higher interest rate.

What to do instead:

• Have a minimum of 6–12 months of work experience in your present job before making an application.
• Salary slips, bank passbooks, and IT returns must be kept handy as proof of income.
• In case you are self-employed, keep your 2-3 years of audited financial statements ready to show your regular income.

8. Choosing the Incorrect Loan Tenure

A shorter tenure will lead to higher EMIs but lower total interest. On the other hand, a longer tenure will lead to lower EMIs but greater overall interest. Opting for a loan without due consideration can cost you more over a period. An optimal tenure makes EMIs affordable at minimal interest costs.

What to do instead:

• Use an EMI calculator to find a balance between the affordability of EMI and interest payments.
• Avoid long tenures to get lower EMIs, as it increases the total interest you will pay over the tenure.

9. Not Considering Prepayment Options

If your income increases or you receive a lump sum in the future, consider early repayment of the loan, as it can save you from paying more interest. However, most borrowers do not seek clarification on part-prepayment or foreclosure terms from the lenders while applying for a loan. Such borrowers may incur severe penalties if they decide to repay the loan in advance later.

What to do instead:

• Always opt for a lender that has zero or minimal prepayment penalties.
• Consider the prepayment factor before selecting a lender, and not afterwards.

10. Applying Without Checking Eligibility Criteria

Most applicants ignore pre-determined eligibility criteria set by lenders before applying for a loan. Verify lender's eligibility parameters, like minimum income, age, employment category, or credit score, before applying.

Failing to meet even one criterion can not only result in rejection but also delays in processing. It can even result in less favourable loan terms, such as higher interest rates or lower loan amounts.

What to do instead:

• Check the eligibility criteria on the lender's website before you apply.
• If you do not qualify, wait and improve your eligibility before applying.

How to Improve Your Chances of Personal Loan Approval?

It is always wise to know the pitfalls of a personal loan application and what to avoid. Here are some practical tips to improve your chances of approval.

1. Maintain a Healthy Credit Score

Your credit score is one of the most important determinants.

• Try to keep it above 750 by paying all credit card bills and EMIs on time.
• Never spend more than 30–40% of your net monthly income.
• Monitor your credit report bi-yearly or annually and rectify any errors that you find in it.

2. Maintain a Low Debt-to-Income Ratio

Lenders consider what portion of your income is being spent to pay off the debts.

• Try to maintain your Debt-to-Income (DTI) ratio at no more than 36%.
• If your DTI is high, pay off smaller loans or credit card balances first before applying.

3. Consider a Co-applicant or Guarantor

Having a co-applicant with good credit can increase your chances of loan approval. 

• This is especially useful for significant loan amounts. 
• Ensure that both applicants' documents and credit histories comply.

4. Time Your Application Strategically

Applying for a Personal Loan at the end of the financial year may have higher rejection rates due to increased demand.

• Apply when your credit score is at its peak.
• Apply when your income documents are updated.

To Conclude

Getting a Personal Loan can be straightforward if you avoid some common pitfalls of personal loans and take a few proactive steps to improve your chances for quick approval. However, consider your loan amount, loan period, and repayment ability carefully before applying. Be honest in your application and always read the terms and conditions carefully.

Are you looking for a quick Personal Loan? Apply for a Personal Loan with Poonawalla Fincorp to avail transparent and customer-focused Personal Loans with affordable interest rates and flexible repayment terms, which empower you to honour your financial obligations with ease.

FAQs

If my Personal Loan application gets rejected, how long should I wait before applying again?

It's best to wait at least 3–6 months while working on the reasons for rejection, like improving your credit score or meeting eligibility criteria.

Can I reapply with the same lender after fixing mistakes in my first application?

Yes. If you've corrected the errors, like updated documents or improved your credit score, you can reapply. Simply confirm with the lender if there's a minimum waiting period before reapplication.

Will correcting my credit report errors help me get approved faster?

Absolutely. Disputing and fixing incorrect entries in your credit report will boost your score and reduce the potential areas of concern for lenders.

Should I close old credit cards before applying for a personal loan?

Not necessarily. Closing old cards will reduce your credit history length and available credit, which may lower your score. Instead, keep them active with minimal usage.

Does being self-employed make it harder to get a personal loan?

Not if you have stable income proof, a healthy credit score, and proper financial documentation like audited financial accounts and tax returns.