Why Was Your Personal Loan Rejected? Common Reasons & Fixes

An instant personal loan can be a practical solution when you need quick financial support, whether for covering medical expenses, funding home repairs, or managing unexpected costs.

However, not every loan application gets approved, often leaving applicants wondering about the reasons for rejection.

While a denial can be understandably frustrating, understanding why your personal loan application was rejected – and how to address those issues – can improve your chances of approval in the future.

Let’s dive into the most common reasons for personal loan rejection and the practical steps you can take to fix them.

1. Low Credit Score

Your credit score is one of the first things lenders check when you apply for a personal loan. It serves as a snapshot of your creditworthiness, reflecting how responsibly you’ve managed debt in the past. Most lenders prefer a score of 750 or higher. A score below this threshold signals higher risk to lenders, often leading to rejection. Even if you are approved, you’re likely to face higher interest rates.

Fix: Start by reviewing your credit report for errors – discrepancies like incorrect late payments can lower your score. Dispute any inaccuracies with the relevant credit bureau. If your low score isn’t due to an error, focus on improving it by paying bills on time, keeping your credit utilisation below 30%, and avoiding new debt. It might take a few months of consistent financial discipline to see improvement, but a higher score can increase approval chances with better terms when you apply online for a personal loan again.

2. High Debt-to-Income Ratio

Lenders assess your debt-to-income (DTI) ratio to determine how much of your monthly income goes toward existing debt payments. Generally, a DTI above 30% raises red flags, suggesting you might struggle to manage additional personal loan payments.

Fix: Lower your DTI by paying off smaller debts first, like credit card balances. Alternatively, try to boost your income through freelancing or requesting a raise at work.

Before applying, use a personal loan eligibility calculator, provided online for free by reputed lenders such as SMFG India Credit. This handy tool gives you an estimate of the maximum loan amount you may be able to borrow based on factors such as your age, net monthly income, and net monthly obligations.

3. Unstable Income or Employment History

A steady income reassures lenders that you can repay the loan on time. If you’ve frequently switched jobs or work as a freelancer with inconsistent earnings, your personal loan application might be declined. Gaps in employment or a lack of verifiable income can make lenders hesitant.

Fix: Build a stronger case by remaining in your current job for at least six months before applying. If you’re self-employed, prepare detailed documentation – such as bank statements from the past six months and income records demonstrating at least two years of consistent profits. Additionally, consider adding a co-applicant with a strong credit score and stable income to strengthen your loan application.

4. Incomplete or Inaccurate Application

Submitting an incomplete form, entering incorrect details (such as inaccurate income or PAN), or omitting required documents may result in rejection, as lenders rely on accurate information to assess your eligibility.

Fix: Double-check every field before hitting submit when you apply for a personal loan online. Ensure that your income, address, and contact details match your official records, and verify that all necessary documents are accurate and up to date.

5. Too Many Recent Credit Enquiries

Applying for multiple loans or credit cards within a short period triggers hard enquiries on your credit report. Too many enquiries signal financial distress, making lenders hesitant.

Fix: Space out your credit applications and only apply for a new loan or credit card when it’s truly necessary.

6. Insufficient Income for Loan Amount

Requesting a personal loan amount that exceeds what your income can support is a common pitfall. Lenders assess whether your earnings can comfortably cover EMIs along with existing expenses.

Fix: Be realistic about how much you need and can comfortably afford to repay. Use a personal loan EMI calculator to estimate monthly repayments based on different loan amounts, interest rates (set by the lender), and tenures. This will help you avoid overborrowing and decide whether to apply for a smaller amount or extend the loan tenure.

7. Lender-Specific Requirements

Not all lenders have the same criteria. Assuming all lenders follow the same standards can lead to unfavourable outcomes.

Fix: Research multiple lenders thoroughly before applying. Look for financial institutions whose eligibility requirements, such as income, age, and credit score, align with your profile. Additionally, it is also important to verify the lender’s RBI registration and compare factors such as interest rates, repayment terms, and associated fees and charges (e.g., processing fees, prepayment penalties).

Conclusion

A rejected personal loan application isn’t the end of the road – it’s an opportunity to reassess and strengthen your financial standing. If the lender hasn’t already provided a reason for the rejection, request clarification. Use this insight to address the issue and improve your chances of approval in the future.

*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.