A rejection in a personal loan application can be quite disheartening. After all, your hopes and plans being pinned on that loan, you must now start the process of applying for a loan all over again. But before you go ahead and apply again, you should consider the reasons why your loan was rejected in the first place.
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Banks and financial institutions take a huge risk when they approve and provide a loan to someone. Due to the risks involved, they have a threshold of eligibility for approval and strict criteria that one has to meet in order to get a loan. Listed below are some of the possible reasons as to why a loan application gets rejected. Keeping these things in mind next time you apply for a personal loan will make the process a bit easier.
Low Credit Score
Your credit score is one of the biggest criteria for evaluation. You have to have a decent credit score to get approval. A low score gets rejected, while those in between are generally approved at higher rates of interest. You can maintain a good credit score beforehand if you are diligent with your payments.
Fault in Application
If you have taken a loan before then you will be well aware of the long, harrowing procedures and documentation that you have to deal with before you finally get an approval. However, you need to understand that every document is evaluated carefully and even the smallest fault in any of your personal documents can lead to an immediate rejection. So make sure that all your documents are filled out correctly.
Inadequate Debt-to-Income ratio
Banks calculate your eligibility in terms of debt-to-income ratio. Your debt to income ratio is nothing but all your monthly debts divided by your monthly gross income. This is how lenders calculate your ability to repay the loan. The higher your debt-to-income ratio is the more likely you will be rejected for a loan. Universally a 43% debt-to-income ratio is considered acceptable for a loan.
Matching details with defaulters
It’s not a surprise that banks and other financial institutions maintain a huge database of customers and defaulters. They have access to people’s names, addresses, contact details and their financial histories. In rare cases if any of your details match with that of a defaulter’s then your application is immediately cancelled. If you have never defaulted and this happens to you then you may want to speak to the bank and ask them to consider your application again.
These are just a few possibilities that could have led to a decline in your loan application. If you are still not sure why you were declined then it would be best to contact your bank for the details.