Why my Personal Loan got rejected? Know why.
Shreya Reddy
12/23/2024
Did you know that even small financial mistakes can lead to personal loan rejection? Getting a personal loan rejected can be tough, especially when it’s your only way to get the funds you need. Therefore, it’s a good idea to find out the reasons behind the loan rejection before reapplying, as this will assist you in increasing your chances for loan approval the next time.
Reasons why personal loan got rejected:
1. Low Credit Score
A high credit score can improve your chances of getting a Personal Loan. In the world of loans, credit score is king. Your credit score needs to be above 750, if you have a Low credit score, it shows that you have struggled with managing your finances in the past, such as not paying bills on time or overspending.
2. High FOIR
The Fixed Obligation to Income Ratio is referred to as FOIR. A high FOIR tells that your fixed obligations have already taken up a major part of your income. This can make it more challenging to qualify for new loans or increase your credit limit.
Ideally, you should keep your FOIR under 50% higher chances of approval.
3. Too many hard Inquiries
This can negatively impact your personal loan application as this indicates credit-hungry behavior. Credit-hungry behavior is excessive borrowing without a plan or the ability to manage debt. Additionally, multiple inquiries can negatively impact your credit score, further reducing your chances of loan approval.
4. High debts
Lenders pay close attention to a borrower’s debt-to-income ratio (DTI), which represents the proportion of monthly income that is utilized to settle current debt.
A high debt-to-income ratio (DTI) shows that a major portion of your monthly income is already reserved to repay debts, leaving less room for new financial obligations.
This can make it difficult to demonstrate to lenders that you can comfortably afford the additional monthly payments associated with a new loan.
The DTI ratio is calculated as:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
5. Bad credit history
Lenders use credit report to check the risk. Late payments, defaults and bankruptcy can damage credit. A bad credit history generally indicates that you are not considered creditworthy by lenders
6. Personal Loan Eligibility
When applying for a personal loan, it is important to understand the eligibility criteria set by different lenders. The criteria can vary, but some common factors include Age, employment type, Address Pin-code, Income, and credit score are the common eligibility criteria.
7. Errors in Your Credit Report
The errors in your credit report can stop you from getting a personal loan. The errors could be payments being reported wrongly, closed accounts still showing as open, and false reports of late fees can be the most dangerous reason for the credit score to drop. So, once you have checked your credit report for such errors, the immediate step should be to report the error with the credit bureau.
Don’t give up! If your Personal Loan got rejected, check all the above-mentioned things. Then, you can start taking steps to improve your financial situation and increase your chances of getting your personal loan approved in the future.
Tips to improve you Loan Approval chances:
1. Check your Credit Report regularly
Checking your Credit Report regularly is a good financial habit one should follow. This will ensure that there are no errors in your report. There are a lot of online tools where you can check your credit report for free.
2. Improve Credit Score
Paying bills on time, avoiding new credit or hard inquiries, and reducing debt are the top things to do to increase to credit score.
Click here to know how to increase your credit score.
3. Reducing FOIR
Here’s an easy way to calculate your FOIR. Divide your total fixed monthly expenses by your gross monthly income.
FOIR = (Fixed Obligations / Net Monthly Income) × 100
Example:
Let’s consider the following example:
Net Monthly Income (NMI): ₹50,000
Fixed Obligations are:
- Home Loan EMI: ₹10,000
- Car Loan EMI: ₹5,000
- Credit Card Minimum Payment: ₹2,000
Total Fixed Obligations= Home Loan EMI+ Car Loan EMI+ Credit Card Payment
Total Fixed Obligations = ₹10,000 + ₹5,000 + ₹2,000 = ₹17,000
FOIR = (₹17,000/ ₹50,000)×100 = 34%
Generally, lenders prefer a FOIR below 40% to 45%.
Refer to this post for more information on FOIR. 👇
Conclusion
Keep in mind that building a good financial foundation requires patience. Follow the above tips to make sure that you’re sorted for the next time you apply for a Personal Loan. Improving your credit score, reducing FOIR, and having a good credit history will lay the groundwork for a brighter future.
At Finance Buddha, we understand that financial needs can arise unexpectedly. We make funding easy so you can focus on what matters most.
Submit your application now and let us help you meet your dreams!
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