These days, if you want to apply for a personal loan, you have a multitude of options to choose from instead of going to a bank. Digital lenders have made the loan application process easy by offering unsecured loans, without the need of providing collateral as security or filling out tedious paperwork.
Since these loans are unsecured, the lenders follow specific eligibility criteria and reviewing parameters when approving loans to creditworthy borrowers. This criteria safeguards the lender from high default risks when they approve applications.
When applying for a loan, many people (especially new-to-credit and first-time borrowers) are unaware about leveraging these factors that can increase their chances of approval- and all of them are simple to follow.
We’ll discuss how you can reduce the chances of your personal loan application from getting rejected.
1. Ensure You Meet All Minimum Qualifying Criteria
One common reason why your loan application can get rejected is because you did not meet the lender’s basic eligibility criteria in the first place. As mentioned earlier, each lender has a particular set of qualifications that an applicant must meet in order to be eligible for a loan. These common criteria include age, location, and salary.
If you apply for a loan without even checking if you’re eligible with the lender in the first place, you’re guaranteed to face a higher chance of rejection. Avoid this by referring to the lender’s website where you’ll discover their eligibility criteria.
2. Fill the Application Form Correctly
Another major reason that loans get rejected has to do with the details- or lack thereof- provided in the application. Providing missing or inconsistent information in your loan application is an easily avoidable mistake if applicants take the necessary time to double check the details they’ve given in their application form. Signature mismatches can occur with anyone, so ensure the signature on your application form matches with that of your KYC documents.
If you’re truly serious about getting your loan approved, avoid deliberately falsifying information- lenders are able to confirm the authenticity of both the details submitted in the application form, as well as your KYC documents.
3. Provide All Necessary Documents
Along with your application form, you’ll be required to provide supporting evidence of your personal details via KYC documents, such as PAN card, Aadhar card, or passport. Lenders will scrutinize your form to ensure that all information is correct as per the documents. Any inconsistency found within these details will lead to your loan being rejected.
This includes not only your name and identity but income proof from your employer. With your salary and income tax proofs, lenders are able to verify the details that you have provided in your form.
4. Maintain A Good Credit Score
Your credit score has a significant impact on your personal loan application, since it’s a summarized snapshot of your creditworthiness. Every bank and lender checks an applicant’s credit score because it helps to ascertain one’s creditworthiness and default risk.
Measured on a scale of 300 to 900, the closer your score is to 900, the better your score. While a score of 900 is perfect, a score of 750 and above is excellent. Credit scores between 600-700 are considered average and anything below 600 is poor.
You can always increase your score by making your credit card payments on time. Another way to increase your credit score is by maintaining your credit utilization ratio below 30%. This means that if you have a credit limit of Rs 1 lakh on your credit card, you should spend less than 30% of the entire limit, or less than Rs 30,000.
5. Have Low or Non-Existent Outstanding Debts
Another reason why a loan application can be rejected is if an individual has many outstanding debts. Lenders view such an applicant to be already heavily burdened with credit repayments.
Even if one meets all other criteria by the lender, having too many high outstanding debts means that the person would qualify as a high-risk individual with a strong likelihood of defaulting on repaying a new loan. In addition, this would damage the individual’s credit score.
The best option in this scenario is to work on rebuilding your financial stability and credit score before applying for a new loan. Even if your current debt is on the lower side, it’s wise to pay it off in a timely fashion and then proceed to taking out a new loan.
6. Income & Employment History
As mentioned earlier, lenders will have a set minimum income requirement in order to be eligible. If you apply for a personal loan which is higher than your eligibility, then your application will most likely be rejected.
Banks and lenders will offer personal loans to individuals with a proven stable employment history. If you’re currently not in a steady job, the lender will categorize you as a high-risk individual, since it can be assumed you won’t have the financial means to repay the loan in a timely manner. Therefore, avoid applying for a personal loan if you have recently changed your job, or are without one. They are considered less creditworthy and financially responsible.
If you have currently been with a single employer for less than 6-12 months, then it’s best to wait until you’ve stuck around for a long period of time to demonstrate financial stability.
7. Avoid Applying for Multiple Loans
Whenever you apply for a personal loan, the lender enquires with the Credit Bureau to obtain your credit report. The credit bureau considers these as serious inquiries and mention the same in your credit report.
A lot of people will apply at multiple places, thinking that it will improve their chances of finding a lender who will approve their application (just like sending out a resume to companies when looking for a job). But the system of applying for a loan works much differently.
If you simultaneously apply for multiple loans, banks and lenders will perceive you as being in a desperate financial situation who is unable to manage their money properly and is always looking to borrow. This is how applying at once to different lenders for a loan will hurt your creditworthiness.
For this reason, it is recommended to not apply to more than 2-3 lenders in a month. Conduct extensive research on the lenders and compare your options. Only select and apply to lenders where you have the most eligibility criteria met.
Remember- the most common reasons why your loan application can get rejected are entirely preventable, with a little planning on your end. If you do get a rejection, you’ll be able to re-apply after 3 months; therefore, it will be more frustrating to have your application rejected simply by committing the errors mentioned above.
Increase your chances of getting your personal loan approved by following the tips in mind and reduce your chances of getting rejected by an avoidable mistake!
Author Bio: This article has been shared by Dinesh Mittal who is a seasoned writer and has over the years contributed quality content on various high-profile websites. He has particularly excelled in niches like Fashion, Business, Entrepreneurship, Education etc. His professionalism, four year’s experience, and expertise make him one of the most sought-after content writers in the field.