Top Reasons for Personal Loan Rejection and How to Avoid Them

A Personal Loan can be the best means to fund your dreams and unexpected expenses. However, in some cases, the lender may reject your Personal Loan application. In this blog, we will discuss the reasons for Personal Loan rejections, how to avoid them, their impact on your financial situation, and steps to reapply. Read on to learn more!

Why Lenders May Reject a Personal Loan Application

Your loan application goes through a strict assessment, and many lenders consider the following factors before finalising the loan terms. If any of these points raise concerns, the lender may proceed with rejecting the loan.

1. Low Credit Score or Weak Credit History

A low credit score or a poor credit history signals a higher repayment risk. Many lenders consider this when deciding loan terms and eligibility.

How to avoid it:
You should check your credit report regularly and correct any errors. Additionally, make timely EMI payments to maintain a credit score above 750.

Also Read: Top 8 Reasons for Loan Rejection with Good CIBIL Score

2. High Outstanding Loan

If you have multiple active loans, lenders may doubt your ability to manage another loan amount. This is because a high debt-to-income ratio affects your repayment capacity and your credit score.

How to avoid it:
Try to repay all your existing debts as soon as possible. Additionally, consider early repayment or loan consolidation to reduce liabilities.

3. Not Meeting Eligibility Criteria

Each lender has clear eligibility criteria, including income, employment stability, age, and credit history. If you fail to meet even one of these requirements, your loan application may be rejected by the lender.

How to avoid it:
Always review the lender’s eligibility requirements carefully before submitting your application. When you apply for a loan, as soon as you meet all the conditions, your chances of approval increase.

4. Incomplete or Incorrect Documentation

To process your loan, lenders require the necessary documents, including proof of identity, proof of address, income statements, and bank account records. Your loan application may be rejected if any of the documents are missing, invalid, or contain errors.

How to avoid it:

Before submitting your application, ensure you have all the necessary documents. Ensure they are complete, up-to-date, and accurately filled out. Providing full and correct documents will increase the chances of your loan approval.

Also Read - How to Track Your Personal Loan Application Status

Impact of Personal Loan Rejection on a Borrower’s Financial Profile

Here are some important points summarising the effect of Personal Loan rejection on a borrower’s financial profile:

• Decrease in Credit Score: Hard inquiries from loan applications reduce your credit score, especially if  applications are rejected frequently.
• Delayed Financial Plans: Rejection can delay important goals, such as education, home renovations, or addressing medical emergencies.
• Expected Risk by Lenders: If you keep getting turned down, potential lenders may see you as a higher-risk borrower.
• Higher Interest Rates Possible: Lenders may offer loans at higher rates if your previous applications were rejected, which can make borrowing more expensive.
• More Relying on Expensive Credit: Borrowers may have to use credit cards or payday loans, which can hurt their financial health.
• Need to Improve Financial Profile: If your loan application is rejected, it means that you need to work on a few areas. This includes your credit history, financial stability, and relevant documents before you can reapply.

How to Reapply for a Personal Loan?

Getting turned down for a loan can feel discouraging, but it’s not the end of the road. Here’s how to bounce back:

1. Understand what went wrong
Was it your credit score, income, or too much debt? Ask the lender, and they’ll usually convey the reason for rejection.

2. Fix the issue
Pay off some debt, build your credit, or stabilise your income. Even small improvements can make a big difference.

3. Give it time
Don’t rush to reapply. Waiting a few months shows lenders you’ve made progress and helps your credit recover.

4. Apply smarter
Look for lenders who match your profile better. You might even consider adding a co-applicant to strengthen your case.

5. Be thorough
Double-check your documents to ensure everything’s accurate. A clean application goes a long way.

Things to Keep in Mind When Reapplying for a Personal Loan

While reapplying for a Personal Loan, keep the following points in mind:

1. Pay your EMIs on time to maintain a strong credit history and healthy credit score.
2. Apply for a Personal Loan only with trusted lenders offering transparent loan terms and minimal processing fees.
3. Avoid submitting multiple loan applications within a short period to prevent a negative mark on your credit report.
4. Review your loan agreement carefully, including the loan cancellation process, cooling-off period, and applicable charges.
5. Keep all required documents ready to ensure a smooth and hassle-free Personal Loan application process.
6. Consult your Personal Loan manager or financial advisor to make an informed financial decision.
7. Settle any outstanding dues or debts before reapplying to strengthen your financial profile and loan eligibility.

Read Also: From Rejection to Approval: Transform Your Personal Loan Journey

To Conclude

There are several reasons why lenders can reject your application for a Personal Loan. If your loan application is rejected, you should ask the lender for the reasons behind the rejection. You should also make an effort to address issues, such as having a poor credit score or lacking proper documentation, before reapplying. 

Looking for a Personal Loan? Connect with Poonawalla Fincorp for a simple and stress-free way to apply for a Personal Loan. To maintain an excellent credit record, remember to borrow wisely and pay your EMIs on time.

FAQs

Does a personal loan cancellation affect my credit score?

If you cancel a Personal Loan, it means you withdraw your loan application after it has been approved, but before or soon after the funds are disbursed. If you cancel early, it typically has no major impact. However, if you cancel after disbursement, you may be required to pay fees or have the cancellation recorded on your credit history.

Are there any fees for cancelling a Personal Loan?

Yes, Personal Loan cancellation fees can differ from lender to lender. Lenders may charge administrative costs, processing fees, or partial interest if you request to cancel the loan after approval or disbursement. If you cancel before disbursement, most lenders don’t levy any charges.

What's the best course of action if my Personal Loan application gets rejected?

Take a close look at the reasons, check your CIBIL score, ensure your credit history is accurate, and make sure all your documents are in order. Also, refrain from submitting multiple applications too frequently.

Can I cancel my loan application after it’s been rejected?

No, once a Personal Loan is rejected, there’s no loan cancellation process; you’ll need to reapply after improving your eligibility.

Will a rejected loan affect my next cancellation request or new application?

A rejected loan won’t impact future cancellation requests, but repeated rejections can affect your credit score and future loan approvals.