Personal Loan is availed by borrowers to meet the immediate financial requirement. It is an unsecured loan. You need not provide any collateral/mortgage to avail the personal loan. The only collateral is signed cheques submitted by the borrower. As it is an unsecured loan, therefore, the rate of interest is much higher at 16%. Now compare it with secured loans like Home Loan at 9.55%. To be very honest, you can avail personal loan only if you are a salaried individual. Second pre-condition of the banks is that you should be maintaining good financial relation with the bank. The loan amount is less and is usually disbursed within 2 working days. The repayment period is from 12 months to 60 months. The biggest disadvantage is that rate of interest is fixed for loan tenure. Sometimes banks also put a restriction on prepayment.
Personally, i don’t like unsecured loans. The reason being, it shows that borrower is in financial distress. On the other hand, Individuals avail personal loan for international holidays, marriage, home renovation, home appliances etc. A personal loan at 16% for luxury or wants defies all the logic of personal finance. It should be availed only for needs like a medical emergency, a shortfall of home loan etc. I have seen individuals availing personal loan to clear credit dues that also shows poor management of personal finance. In short, Personal Loan is BAD LOAN. It impacts CIBIL Score negatively. Too many unsecured loans like personal loan, consumer loan, overdraft etc can decrease credit worthiness in the long run.
The reason for sharing background on a personal loan is to caution readers. You should avail personal loan only in case of emergency. Though banks aggressively promote personal loan. It also carries an element of mis-selling by banks. It is financially beneficial for banks. Banks can park their money at the higher interest rate for the short period. It increases the profitability of banks. Therefore, you must have observed aggressive promotion of unsecured loans in bank branches.
Assuming you applied for a personal loan and it is rejected. This is worst situation for a buyer. A rejection of low-value loan is taken more negatively compared to high-value loan like Home Loan. As i keep highlighting that common reasons given by bank is LOW CIBIL Score. It is not the case always. There are other reasons that are never informed to a borrower. In this post, i will share 5 reasons of loan rejection that banks will not tell a borrower. In other words, you should consider these point to avoid rejection by the bank.
Personal Loan – 5 Important Points to Avoid Rejection by Bank
1. Loan Amount: Before you apply, you should access your requirement. If the requirement is too small then you try to arrange from own sources. According to experts, if you are applying for a personal loan of less than Rs 25,000 then it will be definitely rejected. The reason for rejection is same as i shared earlier. A loan of less than Rs 25,000 means your financial situation is under severe stress. The bank doubts that you will be able to pay back the loan amount. Therefore, for such small requirements, you should maintain a contingency fund. You can dip into it and then replenish it in future.
2. Salary: It’s a catch 22 situation. Banks don’t approve a personal loan if the net take home salary is less than bank’s threshold. Normally, this threshold is Rs 25,000 p.m. In other words, you should check the threshold with banks sales team. Though their target is only to generate the lead still you should insist. In other words, if your take home salary is less than bank’s threshold then you should not apply.
3. Purpose: All the banks ask for the purpose of the loan. It should be worthwhile. If the purpose is not worthwhile then loan rejection is guaranteed. As i mentioned that you should avail personal loan only in case of emergency. Therefore, you should evaluate whether the purpose of the personal loan is worthwhile or not. If it is not worthwhile then you may drop the idea.
Now you must be wondering on one side i discussed how people take a loan for vacation and other luxuries. On another side, i am suggesting that purpose should be worthwhile. Unfortunately, from banks perspective if your salary is high and even if the purpose is meaningless like a vacation then also it is fine. Bank is assured that borrower with high salary will not default. On the other, if the salary is low then purpose should be worthwhile to avoid rejection.
4. Unsecured Loans: If you already have running unsecured loans then you should not apply for a loan. It is sure shot that it will be rejected even if your CIBIL score is more than 750. Alternatively, if your current EMI is around 50% of net take home salary, the chances of approval are NIL. Therefore, before you apply for a loan kindly evaluate current personal finances. Normally, i observed that people take the gamble even though they know about rejection in advance. They are not aware of the impact of this gamble on CIBIL Score.
5. Job Profile: As i mentioned earlier that personal loan is only for the salaried individual. Banks prefer borrowers with salary account. The probability of rejection is HIGH if you are a temporary employee or on probation. Secondly, banks know the churn ratio of an organization as they manage salary account. Therefore, if the churn is high in your organization then the probability of personal loan approval is very bleak. Personally, i observed that employees in high churn industry like BPO, IT etc find it difficult to avail the loan.
Words of Wisdom: You should avoid personal loan until unless it is necessary due to a personal or medical emergency. Before you apply for it, you should explore all other options to raise money on the personal front. If nothing works out then be doubly sure that your loan will not be rejected. Therefore, you should discuss your requirement with a responsible employee of the bank rather dealing with DSA’s or sales team. As the interest rate is high therefore you should keep EMI as high as possible and tenure should be shortest. In case, you are planning to avail Home Loan in next 2-3 years, the idea of personal loan should be dropped.
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