Loans are great way of getting access to the funds to purchase/spend big-ticket spending especially personal loans.
Everyone with a decent Credit score can apply for a personal loan and get their loan in their bank account.
But, when applying for a personal loan, facing rejection can be disheartening and frustrating. However, understanding the factors that contribute to loan application rejection can help you avoid this.
In this article, we will find ways using which you can prevent rejection and increase your chances of loan approval.
Steps to Take To Avoid Rejection of Personal Loan Application
Here are the steps that you can take before applying for a loan-
Check Credit Score
Credit score is one of the main criteria that banks and other lenders looks at before providing you a loan. Lenders often rejects loan applications if you have a poor credit score.
Lenders assess your creditworthiness based on this score, which reflects your past credit behaviour. Before applying for a personal loan, it is essential to check your credit score and review your credit report.
You can find various ways using which you can check your credit score. There are three credit bureaus in India- Experian, Equifax, CIBIL. CIBIL is the most used one and you can check your credit score for free.
You can review the report for any errors, inaccuracies, or discrepancies. If you spot any mistakes, report them to the respective credit bureau to have them corrected.
Your credit account is often depicted with a number between 300-850, A score above 700 is generally considered good, while a score below 600 may be viewed as risky.
If your credit score is low, you can take various steps to improve it before applying for a personal loan. This may involve paying off existing debts, making timely bill payments, and keeping credit card balances low.
By checking and understanding your credit score, you can assess your creditworthiness and take necessary actions to improve your chances of loan approval.
Assess Eligibility Criteria
Every lender has a set policy which they follow to assess an individual for a loan. If you fit their profile then they will provide you the loan.
Each lender may have specific requirements regarding age, income, employment, credit history, and residency. By understanding these criteria, you can determine if you meet the lender’s prerequisites and avoid unnecessary rejections.
The eligibility criteria is set by the lenders are clearly mentioned on the website or you can contact the bank or lenders to know them.
Evaluate your own financial situation and compare it with the lender’s eligibility criteria. Ensure that you meet the minimum income requirement and have a stable source of income.
By assessing the eligibility criteria beforehand, you can identify lenders whose requirements align with your financial profile. This targeted approach increases your chances of approval and minimizes the risk of rejection due to not meeting the lender’s prerequisites.
Maintain Stable Source of Income
Whether you are employee of a company or self-employed, a stable source of income is a must. Lenders want assurance that you can repay the loan amount on time without them having had to take non-payment of loan actions.
You should avoid frequent job changes during the loan application process, as it may raise concerns about your ability to repay. If you’re considering a career transition, it’s advisable to complete it before applying for a personal loan.
By maintaining a regular income, you demonstrate financial stability and enhance your chances of loan approval. The document that proofs your stable income includes salary slips, bank statements, or income tax returns.
If you are self-employed, be prepared to provide additional documentation, such as business financial statements, tax returns, or audited accounts. Consistent revenue and profitability in your business can strengthen your application.
Clear Existing Debts
Clearing your existing debts helps you in avoiding rejection of your personal loan application. Lenders carefully evaluate your debt-to-income ratio, which is the proportion of your monthly income that goes towards debt repayments. By reducing your outstanding debts, you showcase financial responsibility and improve your chances of loan approval.
your outstanding debts, includes credit card payments, loans, and other financial obligations. You can start by creating a repayment plan that outlines all Prioritize your debts based on interest rates or outstanding balances.
High debt balances can negatively impact your debt-to-income ratio and credit utilization ratio. Aim to keep your credit card balances as low as possible and make more than the minimum payment each month. This approach helps you pay down your debts faster and showcases your commitment to managing your finances effectively
Provide Accurate Information
When filling out the loan application form, ensure that you provide complete and accurate information.
Double-check the form for any missing or incorrect details before submitting it. Incomplete or inconsistent information may raise doubts and lead to rejection.
Make sure to submit all the required documentation accurately. This includes proof of identity, address, income, employment, and any other documents specified by the lender.
Ensure that the documents are up to date, valid, and reflect your current circumstances. Be transparent about your income and financial situation.
Provide accurate details regarding your salary, bonuses, commissions, and any other sources of income.
By providing accurate information, you build trust with the lender and increase your chances of loan approval.
Lenders value honesty and transparency, and providing precise details helps to establish your credibility as a borrower.
Avoid Multiple Applications
When you submit applications to multiple lenders, each inquiry is recorded on your credit report. This can be seen by other lenders when they review your credit history.
Multiple inquiries within a short period may raise concerns about your financial stability or suggest that you’re seeking credit beyond your means.
Furthermore, making multiple applications can result in a lower credit score. Each application is considered a hard inquiry and can lead to a temporary dip in your credit score.
A lower credit score may affect your loan eligibility and the terms offered by lenders. Instead of applying with multiple lenders, it’s advisable to do thorough research and select a few reputable lenders that align with your needs and eligibility criteria.
Compare their loan terms, interest rates, and repayment options to find the best fit for your financial situation.
Applying to multiple lenders simultaneously can raise red flags and indicate financial desperation. It’s best to research and select a few reliable lenders to minimize the risk of rejection.
Provide Collateral or A Guarantor
Some lenders may require collateral or guarantor when granting a personal loan. Collateral or guarantor is an asset/guarantee that you pledge to secure the loan, such as a property, vehicle, or savings account.
By offering collateral, you provide the lender with an additional layer of security, assuring them that if you default on the loan, they can recover the debt by claiming the collateral.
Having collateral can increase your chances of loan approval, as it reduces the lender’s risk. However, it’s important to carefully consider the implications of pledging collateral, as defaulting on the loan could result in the loss of the asset used as collateral.
It’s crucial to select a reliable and trustworthy guarantor who fully understands the responsibility they are undertaking.
Seek Professional Assistance
Obtaining professional assistance can greatly benefit you when applying for a personal loan. Financial advisors, loan agents, or credit counsellors possess expertise in assessing your financial situation and guiding you through the loan application process.
They can provide valuable insights, help you understand the intricacies of loan terms, and offer personalized advice based on your unique circumstances.
Professional assistance can help you in several ways. They can help you determine the loan amount that aligns with your financial capacity, assess your creditworthiness, and identify any potential roadblocks that may affect your loan approval.
They can also guide you on how to improve your credit score and suggest strategies to present a stronger loan application.
By following the steps outlined, such as checking your credit score, assessing eligibility criteria, maintaining a stable source of income, clearing existing debts, providing accurate information, and seeking professional assistance, you can significantly improve your chances of loan approval.
Remember, each step plays a crucial role in the overall loan application process, ensuring that you present yourself as a reliable and creditworthy borrower whom lenders can trust is important.
By demonstrating financial responsibility, providing accurate information, and exploring available resources, you can navigate the personal loan application journey with confidence and increase your likelihood of securing the loan you need.