Why your Personal Loan Application can be Rejected?

"Discover the common reasons behind personal loan rejections and learn how to boost your approval chances for instant personal loan from My Mudra."

5 mins read

Published: 2 September 2023

Updated: 19 September 2023

Personal loans are a popular financial service that many individuals turn to when they need funds for various purposes, such as debt consolidation, home improvement, medical expenses, or even a dream vacation but sometimes due to various reasons face personal loan rejection. While personal loans can be a convenient way to access funds, it's important to remember that loan approval is not guaranteed. In fact, personal loan applications can be rejected for a variety of reasons, and understanding these reasons is crucial for anyone considering applying for a personal loan.

In this article, we will learn about the various personal loan rejection reasons. By understanding these reasons, you can take proactive steps to improve your chances of approval and make informed financial decisions.

1. Poor Credit Score

One of the most common reasons for personal loan rejection is a poor credit score. Your credit score is a numerical representation of your creditworthiness, and lenders use it to assess the risk of lending to you. If your credit score is low, it indicates a history of late payments, defaults, or other negative credit events, making you a riskier borrower in the eyes of lenders.

Lenders typically have a minimum credit score requirement for online personal loan applicants. If your score falls below this threshold, your application is likely to be denied. It's crucial to regularly monitor your credit score and take steps to improve it by paying bills on time, reducing outstanding debt, and addressing any errors on your credit report.

2. Insufficient Income

Lenders want to ensure that borrowers have the financial means to repay the loan. Therefore, they often require applicants to meet a minimum income threshold. If your income is too low or does not meet the lender's requirements, your application may be rejected.

To increase your chances of loan approval, you can provide proof of a stable and sufficient income. This may include pay stubs, tax returns, or employment verification documents. Additionally, consider applying for a loan amount that aligns with your income to demonstrate your ability to repay.

3. High Debt-to-Income (DTI) Ratio

Your debt-to-income ratio (DTI) is a crucial financial metric that compares your monthly debt payments to your monthly income. Lenders use this ratio to assess your capacity to take on additional debt. A high DTI indicates that a significant portion of your income is already committed to servicing existing debts, making it riskier for lenders to approve your personal loan application.

Lenders typically have a maximum allowable DTI ratio, and if your ratio exceeds this limit, your application may be rejected. To improve your DTI ratio, focus on paying down existing debts or consider applying for a smaller loan amount.

4. Unstable Employment History

Lenders prefer borrowers with a stable employment history because it provides assurance that you have a consistent source of income to repay the loan. If you have a history of frequent job changes, unemployment gaps, or inconsistent income, it can raise concerns for lenders and result in a loan denial.

To mitigate this risk, try to maintain steady employment and income for at least a few years before applying for a personal loan. Providing documentation of your employment history and stability, such as employment verification letters, can also help strengthen your application.

5. Lack of Collateral

Personal loans are typically unsecured, meaning they do not require collateral like a car or a house to back the loan. However, some lenders offer secured personal loans, which do require collateral. If you apply for an unsecured personal loan but do not meet the lender's credit and income requirements, they may offer you a secured loan instead.

If you don't have suitable collateral to secure the loan, you could face rejection. Be sure to understand the loan terms and collateral requirements before applying to avoid any surprises.

6. Incomplete or Inaccurate Application

Submitting an incomplete or inaccurate loan application can lead to rejection. Lenders rely on the information you provide to assess your creditworthiness and make a lending decision. If there are discrepancies or missing information in your application, it can raise doubts about your credibility as a borrower.

To avoid this issue, carefully fill out the loan application, double-check all the information, and provide all required documentation. Be honest and transparent about your financial situation, as providing false information can lead to not only rejection but also legal consequences.

7. Recent Bankruptcy or Default

Recent negative events in your credit history, such as bankruptcy or loan defaults, can significantly impact your ability to get approved for a personal loan. Lenders are cautious about extending credit to individuals who have recently experienced financial difficulties.

Bankruptcy, in particular, remains on your credit report for several years and can make it challenging to obtain new credit. If you've recently filed for bankruptcy or experienced a default, it's advisable to focus on rebuilding your credit before applying for a personal loan.

8. Applying for Multiple Loans Simultaneously

When you apply for multiple loans from different lenders simultaneously, it can raise red flags for creditors. Each time you apply for a loan, a hard inquiry is made on your credit report. Multiple hard inquiries within a short period can lower your credit score and signal to lenders that you might be in financial distress, increasing the likelihood of rejection.

To avoid this, research lenders and loan offers carefully, and only apply for loans that you genuinely need. If you're rate shopping for a specific type of loan, do so within a relatively short time frame, as credit scoring models typically treat multiple inquiries for the same type of loan as a single inquiry.

9. Lack of Credit History

While having a poor credit history can lead to loan rejection, having no credit history can also pose challenges. Without a credit history, lenders have no information to assess your creditworthiness, making you a risky proposition.

To build a positive credit history, consider starting with a secured credit card or becoming an authorized user on someone else's credit card account. This will allow you to establish a credit history and demonstrate responsible credit use.

10. Loan Amount Too High

Sometimes, the loan amount you request can be a reason for rejection. If the amount you're applying for is significantly higher than what your income and credit profile can support, lenders may deny your application.

To increase your chances of approval, be realistic about the loan amount you request. Calculate your needs carefully and consider your ability to repay the loan comfortably within the lender's terms.

11. Age and Legal Eligibility

In some regions, there may be age restrictions on who can apply for a personal loan. For example, you might need to be at least 18 or 21 years old to be eligible. Additionally, lenders often require borrowers to be legal residents or citizens of the country where they're applying for the loan.

If you don't meet these legal eligibility criteria, your loan application will likely be rejected. Make sure to verify the age and citizenship/residency requirements before applying for a personal loan.

12. Unfavorable Economic Conditions

Economic conditions can influence a lender's willingness to extend credit. During periods of economic downturns or financial instability, lenders may become more cautious and tighten their lending criteria. This can result in increased rejection rates for personal loan online application.

Unfortunately, economic conditions are beyond your control. However, you can prepare by maintaining a strong credit profile and financial stability so that you're in the best position to secure a loan when needed.

13. Negative Lender Policies

Sometimes, a personal loan rejection may not be due to your financial situation or creditworthiness but rather the policies of the specific lender you've applied to. Different lenders have varying risk tolerance levels and lending criteria


There could be many personal loan rejection reasons, but if a borrower keeps these factors in mind then the approval of a personal loan could become a cakewalk. Get your personal loan approved hassle-free with less documentation and the lowest interest rate. My Mudra is your one-stop destination for the loans. Make loans a planned decision rather than a burden on your shoulders.

Also read: Get Personal Loan Online

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