Top 7 Loan Rejection Reasons And How To Fix Them

The last thing you want to see when you are in desperate need of money is a message from your lender, informing you that your loan application has been rejected. In the face of rejection, you might not know what to do next. And this lack of awareness could prevent you from getting another loan in the future. 
 
Hence, it is crucial to understand why your application was turned down in the first place, how long you need to wait before reapplying, and what you need to do to improve the chances of loan approval. Let us take a deep dive into the top loan rejection reasons and how to fix them.
 
Also Read: Ways To Avoid Common Mistakes Before Taking A Business Loan

Top most common reasons for loan application rejection

1. Multiple Loan Inquiries and Applications

2. Poor Credit History

Your credit score is a key consideration for the financial institutions giving loans. If you have never borrowed before, have defaulted, or delayed repayment of loans earlier, it can greatly affect your loan application.  However, there is always a scope to boost your credit score. Here is how. 

• Automate your monthly obligations. It will aid in avoiding the use of existing EMI savings for other purposes.
• Balance your debt portfolio by using a mix of secured and unsecured financing.
• A longer term with no EMI skips is always preferable.

3. Existing Debts

A high debt-to-income ratio gets your loan application rejected more often than not. Having a high volume of unpaid debt can affect your chances of getting large loans. This can end up as one of the key business loan rejection reasons. Having unpaid debts can also be one of the top home loan rejection criteria. 

Suppose you earn Rs 70,000 per month. Out of this Rs 60,000 goes towards debt repayment. The lender will disapprove your application even if the monthly income requirement on the website is quoted as Rs 15,000.

4. Unstable Employment History

It is one of the personal loan rejection reasons. Having an unstable employment history that affects your chances of making monthly payments on your loan is another factor that may lead to rejection.
 
Although personal loan rejected cases are low due to the emergence of many options for people with unstable/no income, borrowers looking for larger loans will find difficulty. Also, most lending institutions give preference to individuals working in a multinational company or a public sector unit over those working in small establishments or start-ups.

5. Incorrect Documentation

Providing faulty documentation or filling out application forms incorrectly will not just lead to instant loan rejection, but also a significant reduction in the trust the lender has in your ability to pay them back.

6. Low Annual Income

Financial institutions thoroughly analyse your income and lifestyle before giving out a loan. They know whether or not you are capable of repaying the amount on time. A low annual income can do a lot of damage to your chances of securing a loan.

7. How long to wait Before Reapplying?

If your loan application is rejected, it is prudent to wait for at least 30 to 45 days before reapplying. This is to ensure that your credit report does not get affected too much due to multiple loan inquiries in a short period.

Also Read: Tips to Follow If Your Loan Application Gets Rejected
 

Steps to Prevent Loan Rejection

Rejection of loan application might be a wakeup call for many to get their finances in order. Several easy, albeit time-consuming, steps can be taken to boost the loan approval chances such as:

Step 1-Developing credit over time is most crucial. Borrowing and repaying loans on time will ensure that in the future, you will get better interest rates and fewer loan rejections.

Step 2- It is further worth mentioning that you need to submit all the required documents, fill the application form without errors, and also ensure you are eligible before applying. 

Step 3- Paying off existing debt and gradually increasing your income and savings can go a long way in boosting lenders’ confidence in your creditworthiness. 

Step 4- Lenders prefer a manageable debt-to-income ratio. Reduce existing debts and keep repayments within a reasonable portion of your income to improve approval chances.

Step 5- Check your credit report for errors before applying. Correcting inaccuracies ensures a clean report, boosting your chances of loan approval.

Also Read: Top reasons your loan application was rejected even with an excellent credit score.
 

Conclusion

There is no guarantee that you will get your loan in the first attempt. But a little bit of patience and adherence to the steps mentioned above can go a long way in molding you into the ideal borrower to whom financial institutions are eager to lend. 
 

Frequently Asked Questions About Loan Rejection Reason