Reasons Personal Loan is Rejected even with a Good Credit Score

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Lenders often resort to credit rating companies to evaluate an individual’s credit score before lending. A credit score is a number between 300 to 900 allotted to an individual based on their borrowing and repayment history. The higher the score, the better are a person’s chances of obtaining a loan. However, a credit score is not the only factor determining a person’s personal loan eligibility.

Let’s take an example. 

Rajiv recently made a personal loan application that was rejected despite a good credit score. Since he was always prompt in paying his EMIs and credit card bills, he wondered why his application was rejected. 

Let’s understand the possible reasons for the rejection of Rajiv’s personal loan application:

  • Existing EMI obligations

Personal loan eligibility is calculated as a ratio of the existing EMI obligations to a person’s total income. 

Taking the above example, if Rajiv earns INR 200,000 per month and pays EMIs of INR 50,000, then the ratio of his existing EMI obligations to his total income is 25% (50,000 / 200,000). 

However, assuming Rajiv pays EMIs of INR 120,000, this ratio would be 60% (120,000/200,000).

Any ratio below 30% is generally considered as good and the lender may approve an individual’s personal loan on this basis. A higher ratio could make the lender reject the loan application. 

  • Amount of the loan application

Individuals opt for personal loans for reasons including meeting personal needs of higher education, home renovation, medical emergencies, travel etc. There are no end-use restrictions in applying for a personal loan, as opposed to applying for a specific home loan or a vehicle loan.

However, the amount of loan applied for, should be within an individual’s financial means. Since there are no specific benchmarks or ratios for arriving at this number, this is left entirely upto a lender’s discretion and a bank’s internal policies.   

Prior to applying for a loan, it is prudent to do some research on eligibility based on one’s income stream. For example, if your monthly income is INR 30,000 and you make a loan application of INR 50 lakhs, the application may be rejected.

  • Financial stability

This is one of the crucial factors determining the approval of the loan.

If Rajiv has joined a new employer recently or changes jobs frequently, his commitment and financial instability may be the reasons for the rejection of his loan application. In contrast, his friend Amit, who has been employed with the same employer for the past 3-4 years has a better chance of procuring a personal loan, solely on account of his financial stability.    

Many individuals who have been fired or have left a job without another job in hand may find their application being rejected due to an unstable financial position. 

  • Collateral/Guarantee offered

Banks and financial institutions generally demand collateral or security for approving a personal loan. The security may be in the form of assets, shares, securities, fixed deposits, post office deposits or jewellery. If the value of securities offered is nominal or is volatile, the loan application may be rejected. Fixed deposits are generally considered as stable security rather than penny stocks.

In cases where the lender demands a personal guarantee instead of collateral, one needs to ensure that the guarantor has financial credibility.

Conclusion

If you are applying for a personal loan, be mindful of these factors. These are some of the factors which can be taken care of before making the loan application so as to avoid rejection. 

Talking to different lenders or a financial adviser can help your application navigate smoothly. You can also make use of a personal loan EMI calculator to calculate your EMIs depending on the principal amount, personal loan interest rates and tenure. For more information, please visit Tata Capital’s website.