Reasons Why Lenders Can Reject Your Loan Application

Last Updated : Sept. 9, 2020, 5:53 p.m.

Nobody wants to face rejection when they are looking for a loan to fulfill their various needs. Lenders provide different kinds of loans to customers that include personal loans, home loans, gold loans, etc. A rejection from lenders means you will not be able to get the required money and when there is no money, you will not be able to fulfill your needs. This is why one of the common questions among the customers who want to take a loan is – “Why would a loan be rejected?”

Well, there cannot be a single reason behind the loan rejection. Each loan is different from another, hence the reasons for loan rejection can be different. If we were to list down a few popular loans, it will be Personal Loans, Gold Loans and Home Loans. So, we will primarily focus on them and will cover the reasons why your loan could be rejected in the case of these three loans one after another. If you are going to opt for any of them and don’t want to face rejection from the lender, this could be an insightful read for you.

First, we will look at the reasons for personal loan rejection. So, without any further delay, let’s get to it.

Personal Loan Rejection Reasons

A Personal Loan is one of the popular loans among customers and people generally take it when they fall short of money to fulfill their immediate expenses. The biggest reason: customers don’t need to pledge any kind of security or collateral against the loan amount.

Before providing a personal loan to an individual, the lender evaluates several factors that help determine the eligibility of an individual. And there are several reasons that can contribute to the rejection of a personal loan application. We are showing some of them. Please have a look.

• The first and foremost thing lenders check is the Credit Score of an individual that usually ranges from 300 to 900 in India. A credit score defines the creditworthiness of an individual. People with low credit scores of 650 and below are likely to face personal loan rejections more than someone having a score of 700 and above. Since a personal loan is an unsecured loan, lenders want to minimize the credit risk as little as possible. So, to avoid rejection, improve your credit score before applying for a personal loan.
• A low monthly income could also lead to the rejection of your personal loan application. Reason: you repay your loan with your monthly income. So, if you don’t have sufficient income, it would be risky for a lender to provide the loan. Some lenders also have a fixed condition about the minimum monthly income to be eligible for a loan. Remember, this condition usually changes from one lender to another and from one city to another.
• Taking the cue from the previous reason, a higher Fixed Obligations to Income Ratio (FOIR) could also be a factor behind your loan rejection. Ideally, this ratio should range from 40% to 50%. A lower FOIR means an individual has fewer existing obligations (Loan or credit card EMIs), leading to better repayment capacity and higher chances of approval. Moreover, customers with low FOIR can get a higher loan amount due to higher disposable income in their hands.
• Instability in your job history could also be the reason why your personal loan could be rejected. What does this mean? Lenders prefer to provide a personal loan to those who have stable jobs. So, the frequency of job switches can have a negative impression on your lender. Some lenders even ask for a minimum number of years in the current job to be eligible for a personal loan.
• Submitting incomplete documents can also lead to rejection of your personal loan application. So, while applying for a loan, make sure you fill the application form carefully and recheck the list of documents that need to be submitted.
• Other than these reasons, lenders also ask customers to fall in the eligible age criteria that can vary from one lender to another. On failing to meet this condition, your personal loan could be rejected. You should also see if the lender is offering a personal loan in the current residing city.

Reasons Behind Home Loan Rejections

People apply for home loans to buy their own home given the surging property prices. Since these loans are taken usually for a longer period (15 to 20 years), an individual needs to take extra care before making the final decision. While preparing for a Home Loan, a lot of individuals want to know about the reasons that could make lenders reject Home Loans.

So, we are showing some of the important reasons that could lead to a home loan rejection. Please check.

• No lender would want to give a Home Loan to an individual who has a bad credit behavior and does not pay EMIs on time. Lenders analyze the repayment behavior by checking the Credit Score of individuals. So, if an individual has a poor credit score, it is possible that a lender could reject your home loan application. Whereas individuals with good credit scores (700 or above) have higher chances of getting a home loan approval.
• Your age can also play a crucial role in the rejection of your home loan application. Lenders usually like to provide a home loan with a higher monthly income. So, if a young individual has just joined a company, he/she may have a lower income. Similarly, an individual close to his/her retirement may also have a lower repayment capacity. Each lender has fixed age criteria that an individual has to meet if he or she doesn’t want to face rejection from the lender.
• You should also check if there is an error in your credit report as it could also lead to the rejection of your home loan. That’s why it is necessary to rectify any kind of error in it.
• Lenders also check the overall profile of an individual which includes the nature of your employment and employer history. Lenders could reject your home loan application on not finding the overall profile eligible for a home loan.
• The most important thing in your home loan is the property for which you are taking the home loan. One of the major reasons that could lead to Home Loan Rejection is the property not deemed fit according to the guidelines fixed by the relevant authorities. Apart from this, there could be an issue with the builder. You should also remember that your home loan may get rejected if the property is too old.
• Your existing obligations (Loan and Credit Card EMIs) including the Home Loan EMI should not exceed beyond 50% of your overall monthly income. It may vary according to the overall income of an individual. Lenders may reject your home loan application in such cases due to low repayment capacity. However, one of the methods to prevent this is by adding your earning family member as a co-applicant.
• Documentation is an integral part of the home loan process. So, you should keep this in mind to furnish all the required documents carefully with your application form, otherwise, you could face rejection from the lender.
• A low monthly income could also result in a home loan rejection. The reason: Home Loans are generally high-ticket purchases, so an individual should have sufficient monthly income to pay the resulting EMIs. Lenders check the monthly income of an individual before sanctioning a home loan.

Can a Gold Loan be Rejected?

Gold Loan helps customers in getting the required loan amount by submitting their Gold Ornaments and Coins as the security at affordable interest rates. The reason behind the popularity of the Gold Loan is the convenience and affordable interest rates that customers get. But the major reason is it’s lenient eligibility criteria as compared to other loans that help customers get the required loan amount with the utmost ease. The only thing customers need to have is the Gold Ornaments and lenders will provide the money.

When customers fully repay the loan, the gold will be returned back to them. The collateral is the reason why rejection may not happen in the case of a Gold Loan. However, it is possible that customers may get a lower loan amount if the ornaments have a higher composition of metals other than Gold. The Gold Loan amount directly depends on the overall gold price and lenders will only evaluate the gold parts of your ornaments and not other metals attached to your ornaments or coins.

So, the chances of a Gold Loan Rejection are quite scarce due to its secured nature. However, some lenders ask for a fixed purity of the Gold to get a loan. So, if you submit ornaments below the pre-defined purity criteria, you may have to face Gold Loan Rejection or lenders may provide a lower loan amount.