If you’re looking forward to a personal loan to assist you in achieving your financial goals or bail you out of a tricky situation, a loan rejection is perhaps the last thing you’ll want.
There are certain reasons why a majority of personal loan applications get rejected. You’ll be well-advised to be aware of them to ensure you steer clear of them and get the financial assistance without any hassle.
Here are 4 common reasons why personal loan applications get rejected.
1. Income criteria
Your personal loan application might get rejected if you do not meet minimum income requirements, or have a high debt-to-income ratio. Let’s see how:
Every loan package comes with a minimum annual income requirement. The income criteria may vary depending upon the type of application, i.e. individual or joint application, and the policies of the lending bank or institution.
So it is recommended that you read the terms and conditions and evaluate the requirements of a loan package before applying for it. Keep in mind that a loan application rejection can impact your credit score as well.
High debt-to-income ratio
Your debt-to-income ratio is a ratio of your total monthly debt payments divided by your gross monthly income. As such, just meeting the annual income requirement of a loan doesn’t assure you a loan approval — the applicant also needs to ensure his/her debt-to-income ratio is not high.
There are a number of banks that do not approve a loan application if the debt-to-income ratio of the applicant is more than 0.6.
2. Credit score and credit history
Another major factor that your loan approval depends upon is the credit score in your credit report. A credit report is a compiled database of your credit history that defines your financial health, which helps banks and other financial institutions to decide whether to approve or reject your application for financial products like home loans, credit cards, personal loans, etc.
In fact, your credit score also determines the rate at which the banks will lend you the money. If your credit score is low, they might agree to extend the loan but at a higher interest rate than others.
The two major credit reports in Malaysia are Bank Negara’s Central Credit Reference Information System (better known by its abbreviation CCRIS) and privately-owned CTOS. Click here for a detailed guide to both CCRIS and CTOS reports, including tips to improve their scores.
In short, here are some major factors that impact your credit score:
- Payment behaviour with past credit lines: If you have missed repayments on your current or past credit lines, your credit score can drop and impact your future loan applications
- Special Attention Accounts: If you have any Non-Performing Loan to your name that is under close supervision of financial authorities, it might be a bad news as far as your loan application is concerned
- Amount owed through credit lines: Your credit score also depends upon the amount you owe to the bank or financial institution through these lines of credit
- Types and number of credit lines (secured and unsecured loans): Your credit score also depends upon the mix of credit lines you have ( i.e. secured loans like a car loan, and unsecured loans like a personal loan and credit cards)
- Length of credit history of every credit line: Your credit score is also dependent on the time you have maintained or have been maintaining the credit lines for
- Newly approved credit lines: Your credit score can take a hit if you have recently been approved a new line of credit
- Credit limit: If you’ve maxed out your credit card or overdraft limits, chances are your credit score will take a hit and impact whether your loan application will be accepted or not
3. Number of applications
So you find yourself in need of instant funds. You decide to opt for a personal line of financing for the same. But did you end up applying for a number of loans at once in the process? If yes, you might have done a disservice to your loan application.
Most of the banks and financial institutions keep a track of the number of times you have applied for a loan, and more importantly, the number of rejected applications out of this number. Applying for a number of loan packages is often perceived as your desperation, which doesn’t bode well with your chances of getting your loan approved.
When you’re applying for a loan, it is suggested that you filter the banks and loan packages carefully and do not blindly apply for loans with a large number of institutions as it may cause a loan rejection.
4. Errors in documentation
One of the most common reasons for a loan rejection is improper and irregular documentation. Every loan application process requires you to present a set of documents.
These are the usual documents that you need to submit for a personal loan application:
- For salaried professionals: Copy of MyKad/NRIC, latest EPF statement, last 6 months’ salary slips, last 6 months’ bank statements, and latest Form BE with tax payment receipt
- For self-employed: Copy of MyKad/NRIC, Business Registration Certificate (ROC & ROB), last 6 months’ bank statements, and latest Form BE with tax payment receipt
If you do not provide the necessary documents in time, you can lose a loan. The banks can also reject an application if they find any discrepancy in the documents submitted.
Also, keep in mind that if you’re approaching a financial institution for a loan with the help of a guarantor, it is important that the guarantor also presents the required documents. If a guarantor fails to prove the financial dependability, your loan application can get rejected.
Tips to ensure your loan application is approved without any issues
In order to avoid your loan application getting rejected (which will also impact your credit score adversely), you’ll be well-advised to follow these tips:
- Improve your credit score before applying for a loan (click here to learn how)
- Compare all the options online before selecting a package that best suits your interests
- Keep in mind the effective interest rate (and not simple interest) to calculate your monthly repayment instalments
- Avoid applying for loans with multiple financial institutions
- Arrange for all the documents before you make the application
- Maintain a low debt-to-income ratio
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