What are the possible reasons for personal loan rejection?

Registered under the companies law, Nidhi companies are non-banking finance entities that are into lending and borrowing with their members

When you apply for a loan, lenders check two things—borrowers’ willingness and ability to repay.

Credit score and history are a good measure of borrowers’ willingness to repay the loan. Their income reflects the ability to repay.

Credit score checks

Typically, lenders have a threshold credit score below which they will not lend. “Banks usually require a credit score of at least 650 or more for sanctioning a personal loan. However, given the recent credit tightening due to the pandemic, this may go up by 20-30 points,” according to Adhil Shetty, CEO, Bankbazaar.com.

If your score is below this threshold, the bank may reject your application. Typically, NBFCs have a lower credit score requirement than banks.

If you do not have any credit history, then the lender would have no way to evaluate your financial habits. In this situation, if you approach a lender with whom you have no history – no savings or salary accounts or deposits – they may reject your loan.

According to Shetty, in case you do not have a credit history at all and you require a personal loan; it may be a better idea to opt for a secure personal loan such as a loan against a fixed deposit.

Income checks

Lenders have a threshold income below which they will not lend. Usually, this limit is set at around 20,000-30,000 a month. However, if your loan is of higher value, then the income requirements could be higher, and a lender can reject your application if your income doesn’t meet the minimum income criteria.

Shetty points to another reason for rejection. Lenders can reject your loan despite having a high income if your Fixed Obligations to Income Ratio (FOIR) is high. FOIR considers all the fixed obligations that a borrower is supposed to meet regularly every month, including house rent, existing debts such as credit card bills and EMIs on other loans, etc. The lower your FOIR, the better. It implies that you have sufficient income to repay your loan. Usually, lenders will not lend if your FOIR is more than 40%.

Other checks

Apart from this, lenders will also look for steady employment and income records, factors such as age, nationality, and so on. Even educational qualification could affect loan approval.

Inaccuracies in your application, especially in name, age, address, etc., make it difficult for the bank to generate the necessary information about you and lead to the application being rejected.

(Do you have personal finance queries? Send them to [email protected] and get them answered by industry experts)

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