Reasons Your Personal is Getting Rejected - Personal Loan Blog - Tata Capital

Why is your Personal Loan getting rejected?

Jan 25, 2018

Characteristics of a Personal Loan

A personal loan is a financial product offered by financial institutions to customers who may need funds to meet some exigencies.

A personal loan has features that include

  • Quick and easy processing
  • Minimum documentation
  • Is an unsecured loan
  • Used for any purpose
  • More expensive than other loans

By their very nature, personal loans don’t require any asset as collateral for the loan. Financial institutions offer these loans on the basis of credit history of the borrowers and their relationship with the lenders. Therefore, if the credit history of borrowers is immaculate, the lender finds no difficulty in extending personal loans to such borrowers.

For instance, Lokesh is a salaried individual with a good track record with his bank. He has taken a home loan and a car loan on which he pays the EMIs on time without any default. He wants to take a vacation with his family and he needs about Rs 1,50,000 for the same. He has only Rs 50,000 and he needs a further Rs 1,00,000. He reckons that he can afford to take the amount as a loan from the bank. He approaches his bank. The bank suggests a personal loan at an attractive interest rate and tenure that Lokesh is comfortable with. The bank is confident that Lokesh will repay the loan comfortably as his relationship with the bank is sound and his repayment history of other loans is excellent.

While extending personal loans to customers, lenders who do not have a past relationship with customers depend on other factors to determine the creditworthiness of borrowers. They include

  • Credit rating from credit bureaus
  • Steady source of income
  • Length of service if salaried
  • Profitable business credentials
  • Standing in society

CIBIL Score

Lenders primarily depend on credit rating from credit bureaus. The most popular one is TransUnion CIBIL (CIBIL) which provides a rating for the creditworthiness of borrowers known as CIBIL Score. CIBIL stores information on over 550 million borrowers in India. Over 2,400 financial institutions including banks and NBFCs are members of CIBIL and they depend on the CIBIL Score to determine the creditworthiness of borrowers.

CIBIL Score helps lenders to assess the repayment capacity of borrowers, especially their propensity to default after 91 days within a year. The score is really a summary of the payment history of borrowers over a time period in relation to loans availed by borrowers from various financial institutions. This score is a 3-digit number ranging from 300 to 900 where 300 represents the lowest credit rating and 900 represents the highest credit rating. Typically, a score of 750 represents a good score and the borrower can get good terms for a personal loan. CIBIL also offers a Personal Loan Score which documents information solely on personal loans taken by borrowers.

Based on the CIBIL Scores, lenders extend personal loans to borrowers with terms and conditions that minimize the risk for them.

Reasons for Rejection

Based on the above information, the reasons why a personal loan gets rejected are

  • Poor CIBIL Score
  • Poor track record of repayment
  • Poor relationship with lenders
  • Frequent job changes if salaried
  • Poor financial health of business if a businessperson
  • Too many loans taken by the borrower
  • Rejections by other lenders
  • Insufficient income source

A poor CIBIL Score need not necessarily mean a rejection of an application. The borrower’s other credentials can overcome the poor score but at more stringent terms especially in respect of personal loan interest rates. This would be much higher and probably the tenure would also reduce. Therefore, in order to avail a personal loan, borrowers should improve their credit score and meet the personal loan eligibility criteria of the lender.

At Tata Capital, we consider your loan application even if your CIBIL Score is low but you have other aspects of your creditworthiness well documented. We would offer terms commensurate with your ability to repay the loan promptly.