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How to avoid rejection of personal loan application

Most lenders consider your loan application after looking at the minimum net monthly income and accordingly, they sanction your loan amount.

, ET Online|
Updated: May 20, 2019, 12.47 PM IST
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Lenders prefer to give personal loans to those who have a stable job.
People generally take a personal loan when they fall short of money to fund their immediate expenses. On the other hand, for a lender it is not that simple. The lender actually considers several factors while evaluating the eligibility of a personal loan applicant before sanctioning a loan. They look into some important factors which basically govern one's credit score.

Gaurav Aggarwal, Head - Unsecured Loans, Paisabazaar.com said that lenders consider several factors while evaluating personal loan applications, chief among them being the applicant's credit score, monthly income, fixed obligations to income ratio (FOIR), employer's profile, job stability and location. Among these factors, applicants can do very little with their monthly income, job profile, location or location to improve their loan eligibility within a short span of time. The optimum management of these factors helps the loan applicant to improve their credit score and thereby improve their loan eligibility. "If you have a score of 750 and above, then it is considered to be a good credit score. Also, a higher score has better chances of loan approval," he said.

Here are some of the dos and don'ts which can help you improve your personal loan eligibility and avoid rejection of loan application/request:

Dos
1. Monthly outgo to income ratio below 40%

If you do not have adequate bank balance, the lender can reject your loan application. Most lenders consider your loan application after looking at the minimum net monthly income and accordingly, they sanction your loan amount.

Gaurav Gupta, CEO, Myloancare.in said that bankers calculate the fixed monthly obligations to net monthly income ratio (aka FOIR) and approve a loan only if this ratio is less than 40-50 percent. While calculating the ratio, the lender includes the EMI on the proposed loan along with other existing EMIs that the borrower is paying in that particular period.

"So, if you want to reduce the chances of rejection of a personal loan application, then you should estimate your loan amount eligibility beforehand and apply for the loan amount within the eligible limit. You also have the option to opt for longer tenure loans, which means lower EMIs and hence lower FOIR which again improves the chances of getting a personal loan," Gupta explained.

2. Ensure timely repayment of credit card dues and loan EMIs
A would-be personal loan applicant should ensure timely repayment of his existing card bills and loan EMIs before submitting a personal loan application to a lender. This is because your track record of timely debt repayment, timely repayment of credit card dues and loan EMIs ensures recovery of credit score.

3. Keep your credit utilisation ratio below 30%
The credit utilisation ratio is the proportion of total credit card limit used by a credit card holder. "Financial institutions consider credit utilisation ratio of over 30 percent as a sign of credit hungriness and hence, credit bureaus reduce credit score on breaching this limit, thereby reducing your loan eligibility. Make sure you have a credit utilisation ratio below 30 percent," said Aggarwal.

Don'ts
1. Making mistakes in the loan application

Banks do not consider loan applications with mistakes or ambiguity. In fact, banks will get the application verified through third-party agencies to ensure that there is no misrepresentation or deliberate hiding of facts. Even if a personal loan application gets an in-principle approval based on the CIBIL score, the final approval of the loan can be expected only if you submit the required documents in a timely and credible manner.

2. Taking multiple loans
People generally look for multiple loans when they don't get the desired loan amount from one lender or they have already taken a loan and want more money to meet certain expenses. But, if you take multiple loans, it could mean over-leverage and risk of falling into a debt trap which can be disastrous for your future financial security as well as it may affect your credit score.

"If you need to take multiple loans as the loan amount sanctioned to you from a particular lender is lower than the required amount, then you should consider taking a mix of secured and unsecured loans to give additional comfort to the bank," said Gupta.

3. Enquiring directly about a loan with lenders
Aggarwal said that personal loan applicants should avoid direct loan and credit card enquiries with lenders as credit bureaus consider such enquiries as hard enquiries. This refers to lender-initiated credit report requests for evaluating the creditworthiness of loan applicants, and this can pull down your credit score by a few points. Instead, personal loan applicants should visit the online financial marketplace to compare various personal loans offerings and select the best one. "Any credit report enquiries made by you through online financial marketplaces to find the best deal available is considered as soft enquiries (self-initiated credit report requests) and hence, do not impact your credit score," said Aggarwal.

4. Making frequent job switches
Lenders prefer to give personal loans to those who have a stable job. For sanctioning a bigger amount of loan, they also consider the time period of your present employment. Thus, you should avoid frequent job switches during your career as it may have a negative impression on the lenders.
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