Right from its inception eons ago, right up to the present day, there has been a monumental growth in the banking sector. But, the basic principles of loans and interest is still considered to be the cornerstone of banking. Taking a cue from grain loans in ancient times, financial products like Home Loans, Personal Loans, Car Loans etc. have made life easier for common man.
In times of dire financial shortage, many of us look to loans to bail us out of trouble. Personal Loans are one of the most sought after loans since it helps take care of financial emergencies while allowing you to repay it in easy monthly instalments.
Additional Reading: 4 Golden Rules Of Personal Loan Repayment
While applying for a Personal Loan has become very simple, there are many cases of Personal Loan rejection as well. The reason for loan rejection usually lies with ignorant mistakes of the applicant.
So, before you apply for a Personal Loan, you must ensure that you avoid the 4 following I’s that can lead to Personal Loan rejection:
- Inadequate Credit History
Your Credit Score and credit history are two very important factors that banks look into before sanctioning a Personal Loan application. And, if your Credit Score is low and credit history is poor, then you are likely to face a loan rejection. Let’s first understand what credit history and Credit Score are.
Your credit history highlights the loans and credits that you have acquired in the past, and analyses if you have repaid them on time. If there were any loan repayment defaults, then it will reflect badly on your credit history.
Based on what your credit history looks like, CIBIL gives you a score called a Credit Score. If your credit history is free of payment defaults, your Credit Score will be high. A decent Credit Score and a good credit history are essential for Personal Loan sanctions since they reflect the applicant’s past experience with credit.
If you have defaulted on loan repayments in the past, the banks will have less confidence in your repaying capabilities and this could lead to Personal Loan Rejection. Also, if you have no history of taking loans or credits, then you won’t have a credit history to show the bank. In this case as well, banks may turn down your application as they have nothing in the past to compare to.
Tip: If your application was rejected on the basis of inadequate credit history or poor Credit Score, then make sure that you take steps to improve your credit history and Credit Score before you apply again.
Wise use of Credit Cards can help you to gradually improve and build your score. So, you could opt to get a Credit Card before going in for a Personal Loan.
Additional Reading: 3 Ways To Improve Your Credit Score Quickly
- Insufficient Income
You have a flawless credit history and a good Credit Score too, but you are perplexed thinking about why your Personal Loan application was rejected. Insufficient income to pay the EMIs on time might be one of the reasons behind loan rejection.
If there is a huge gap between the annual salary you earn and the Personal Loan amount you require, then the bank will be hesitant to sanction your application since it would require proof that you can repay the loan through EMIs without plunging your day-to-day expenses in disarray.
Also, if you are already burdened by a lot of EMIs due to existing loans, then the bank will refrain from sanctioning your application on the grounds of serious doubts about your repayment capabilities.
Tip: If your Personal Loan application was rejected due to insufficient income, then you could opt for a joint Personal Loan with your earning spouse or your parents. This way you can show a higher total income, which will make banks more confident about your repayment abilities.
Alternatively, you can opt for a lesser amount of Personal Loan or opt for a greater tenure that would lead to lesser EMI amounts.
Additional Reading: How EMI Breakups Are Done In Personal Loans
- Improper Documentation
One of the most common reasons for Personal Loan rejection is improper or erroneous documentation.
Spelling mistakes in the name or address, failing to include all sources of income, mismatch of data between what’s written on the application form and what’s provided as proof etc. are a few documentation errors that can lead to loan rejection.
Often, carelessness and not paying attention to detail are blamed for poor documentation.
Additional Reading: Your Personal Loan Eligibility Checklist
Tip: Personal Loan rejection due to documentation errors are easily rectifiable. Before you apply for a Personal Loan again, cross check all the details like name, address, income etc. and make sure that you furnish details in the application in accordance to the data provided in the proof documents.
Clarify all your doubts before submitting the application for a Personal Loan. Make sure your contact number and address are rightly specified, as any error in any of these could lead to a rejection.
Additional Reading: Introducing Paperless Personal Loans
- Ignorant Guarantor To Unpaid Loans
Signing as a guarantor to someone else’s loan is a big responsibility. But, not many understand what it truly means and what its implications are.
By signing the dotted line as a guarantor to a loan, you are accepting the responsibility of repaying the loan debt if the loan applicant fails to repay it on time. The fact that you are a guarantor for someone else’s loan can be a big no-no to some banks that give out Personal Loans.
While some banks might still consider giving loans to a guarantor, your chances of acquiring a Personal Loan for yourself will become extremely difficult if the person for whom you had signed on as a guarantor failed to repay his/her loan.
This means that the burden of repaying someone else’s unpaid loan falls on the guarantor’s shoulders and banks shy away from sanctioning Personal Loans in such cases.
Tip: Never agree to be a guarantor to somebody’s loan unless you trust them completely. Know what you are entering into by signing the dotted line as a guarantor.
Additional Reading: Obligations Of Being A Loan Guarantor
Now that you know all about the 4 I’s of Personal Loan rejection, keep these points in mind and avoid making mistakes while applying for a Personal Loan.
If you face Personal Loan rejection at any point, understand the reason behind it instead of blindly reapplying immediately.