4 Common Reasons for Personal Loan Rejection

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A personal loan may seem like the best bet when you’re in urgent need of funds. But unfortunately, not everybody qualifies for one. There are a number of criteria determining your eligibility for a personal loans. And when you fail to fulfill one or more of these requirements, your application may be rejected. No doubt loan rejection comes as a big blow. Nonetheless, it’s important for you to understand why your application was rejected. This will help you address the problem and apply once again with better chances of approval.

What are the reasons for personal loan rejection?

Your application for a personal loan may be rejected due to a number of reasons. Although every lender may have different criteria for eligibility, almost all of them look for some basic requirements. Based on these requirements, here are the 4 most common reasons for loan rejection:

Also Read: 4 Steps to Take When You’re Denied a Loan

Poor credit score.

Your FICO score is one of the major determinants of loan approval. This score is important for lenders to ascertain your creditworthiness. In other words your score tells the lenders how likely you are to repay the loan. A low credit score means that you have had trouble managing debts or paying bills in the past. This can make lenders consider lending to you as a risk. And this is one of the most common reasons for loan rejection.

Limited or no credit.

More often than not, it’s not your credit score, but the absence of credit that makes a lender reject your loan application. In other words, your loan application may be rejected when you have a thin credit file- meaning that you have just one to four credit accounts on it. Such a report could make it difficult for you to qualify, because lenders do not want to take a chance when you haven’t yet proven that you can handle credit well.  This can turn out to be a major cause for loan rejection.

Too much debt.

Lenders are interested in finding out whether you are likely to repay the loan promptly. That’s why they look at your past debts and monthly obligations.  If you already have too many debts, lenders are convinced that by adding one more debt to the existing ones you would end up struggling to make your monthly payments. This may lead to loan rejection.

Insufficient income.

Your debt-to-income ratio is another important determinant for loan approval. If you have a low income and your debt takes up a large percentage of your monthly income, lenders may not be willing to risk lending you the money.

So if you’re faced with loan rejection, make sure you understand from the lender why your application was rejected. And remember that one loan rejection doesn’t mean that you will not qualify for another.  Most importantly, before you apply again, check for red flags in your credit and ensure you have sufficient income to handle the monthly payments. These simple measures can dramatically improve your chances for approval.