Introduction
Archana Bhardwaj, a school teacher, was shocked when her loan request was rejected despite having a good credit score. Ever since she learnt about the importance of a good credit score while assessing the eligibility of a loan applicant, she had paid all her EMIs on time to maintain a healthy score. She also regularly checked her credit score and was confident that her loan request will be approved in no time. To her utter surprise, the poor credit score of her guarantor cost her approval. There are many like Archana who believe that personal credit score is the only deciding factor while assessing a loan application. Well, that is not the case. Even if you have a stellar credit score, your loan application can be rejected. That is because there is more to one’s creditworthiness than just a
good credit score. Here are a few other conditions you need to be aware of and if required, fix to have a higher chance of getting the loan amount sanctioned.
Why was Your Loan Application Rejected?
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Not Meeting the Income Criteria
Every lender will have its own strict income criterion for loans. If your monthly income does not match the benchmark set by the individual institutions, then your loan amount may be rejected. Though financial institutes are open for negotiations, you must check your income before approaching them. If you feel it may cause a roadblock, wait until you get a hike or take up a part-time job. Sometimes, a few extra bucks can be the difference between approval and rejection.
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Unstable Income and Constant Job Change
Be it a salaried person or a businessperson, lenders want the applicant to have a stable source of income. Therefore, they check the duration one has spent in the current job or business. If you are a newbie or someone who changes jobs frequently, getting the loan approval can be a far-fetched dream.
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High-Debt-to-Income Ratio
The debt-to-income ratio is the percentage of your income spent on repaying debts such as your EMIs and credit card bills. Usually, 40% or above raise a red flag for lenders as it would mean that the applicant would be under major financial strain in case of an emergency. Lenders do not want to finance a person who “already has got much debt” and take the risk of default. Try to settle a few existing loans, before applying for a fresh one.
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Brief Credit History
Having a brief credit history can also be a reason for your loan being rejected. Despite having a good credit score, you may not get the loan because the lender is not convinced with your track record and wants to see how regularly you pay your instalments before giving you additional credit.
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Previous Bankruptcy or Foreclosures
Financial institutions go through your credit history and if they find records of bankruptcy or foreclosures in the past, they may reject the loan. These negative activities usually stay on record for seven years and you may need to wait until then. Alternatively, a credit repair company may be able to help you in such a situation.
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Type of Credit Score Model
There is no one credit score for one person. Different credit bureaus have different scoring systems. The risk managers in financial institutions formulate their own credit rating and so one needs to know to which bureaus your lender has been sending the reports. Sometimes, the report may not reflect a good credit score because it has not been updated in recent times.
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Multiple Loan Applications
Let us assume, before you applied for a loan, you must have checked your credit history and found it in good shape. Soon after, you went to the websites of several lenders and applied for a loan with practically every one of them. After a few days, you discover that the lenders rejected your application. The reason for the loan rejection could be multiple loan applications that made you look like a desperate borrower, thus lowering down your credit score.
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Poor Credit Score of Guarantor or Co-Applicant
Finding a guarantor is just half the job. If your guarantor does not have good creditworthiness, your application will not be cleared. The same rule applies to the co-applicant. In case of a default or delay in payment, lenders get hold of the guarantor/co-applicant and therefore, they want this person to be in a good financial situation. If they have a poor credit history, your loan application may hit a wall. So, choose your guarantor or co-applicant accordingly.
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Avoiding Verification Calls
Depending upon the loan type, the lender conducts telephonic verification, and if required, they send the executive to your residence or site in case of the mortgage loan. If you try to escape those verifications, then even after having a sound credit history, the lender rejects your application.
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Making Frequent Queries
If you don't have a sound profile and somehow meet the lender minimum qualifying criteria, the first thing that you should avoid is making frequent queries with your lender. Doing so will regard you as a desperate borrower, and it may become the reason for loan rejection.
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Wrongly Filled Application
Financial institutes have a thorough verification process and if they find that some of the details provided by you do not add up, your loan may get rejected. So, while filling application forms and attaching corresponding documents, pay extra attention to avoid any mistakes.
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Residential Address
Before you assume that the residential address we are talking about is related to the metro city or any town, keep your assumptions aside. By residential address, we mean the address of a previous loan defaulter. If your address matches the address of the defaulter, there is a high chance that your loan application will be rejected.
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Poor Savings
If you think that simply having a debt-to-income ratio of less than 50% will help in processing your loan application, you are wrong. One of the other common loan rejection reasons is a poor demonstration of savings. When you apply for a loan, the lender checks your account to see if you maintain sufficient balance or not.
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Falsified Documents
Another common reason for loan rejection is applying with fake documents to meet the lender's minimum qualifying criteria.
Also Read: Top 7 Loan Rejection Reasons And How To Fix Them How to Avoid Loan Rejection?
Apart from working on the above factors, you must also consider the following factors to avoid loan application rejection:
- Pay your existing loan EMIs on time
- Request your lender to send a loan closure report to credit bureaus and make sure your credit score gets updated
- Choose the lending institution whose qualifying criteria matches your profile
- If you have any additional source of income, don't forget to show the same to the lender
Conclusion
Well, after stating all these, we do not want you to have an impression that your credit score is not significant. It is and you should always take measures to improve it as a good score gets you better loan terms. However, it is also important that you realise that lenders assess a loan application on other parameters as well. So, be informed about those criteria and make sure you have ticked all the boxes before you approach a financial institution with a loan application.
Disclaimer: This post was first published on 13 August 2019 and has been updated for the latest information, freshness, and accuracy.
