Your credit score plays a very important role in deciding your creditworthiness. It helps lenders to decide whether to approve your credit application or not. If you have a good score, your loan application will be approved easily, and you will also be eligible for favourable terms and conditions on it. On the other hand, if you don’t have an optimum credit score, then no lender would be willing to lend you because they doubt your ability to repay back.
But what if you have a good credit history and yet your loan application got rejected? The answer to this question is simple, it is because lenders do not consider only your credit score while assessing your loan eligibility. Your score just tells them about your financial health, repayment capacity, existing debts and other such information. Given below are some of the reasons why your loan can get rejected despite having a great credit score.
Apart from credit score, your credit report consists of several other remarks or comments made by your lenders or credit card issuers. If you had settled a loan with the bank in terms other than those accepted, then it will reflect in your report and work against you. Bank takes Negative remarks such as "written off", "settled" and "days past due" very seriously while approving your loan application.
A guarantor is the person who is responsible for making loan repayments on time. If you were a guarantor to someone's loan, and have defaulted in making timely payments, then your credit score will take a hit as well.
Defaulter: Most of the financial institutions maintain lists that contain the name, age, address, current employment, and other details of individuals who have defaulted on their payments. If you are in the defaulter’s list, then your loan application will get denied even before the bank checks your credit rating.
If you have many current loan obligations and are spending a high percentage of your monthly income on servicing your existing debt, banks will view you as a 'prospective defaulters'. They will doubt your ability to afford further loan repayments.
Banks generally prefer applications from those individuals who have been actively filing their income tax returns for at least two years before applying for any loan. It is easier to judge the creditworthiness of such individuals as there is an existing record apart from credit score that can help lenders and guide them in the right direction in knowing your creditworthiness before lending you.
Most of the lenders check the nature of your past loans to see if they were secured or unsecured. In case, if the loans are secured which are backed by any security or collateral, banks show less concern. However, if the loans are unsecured, lenders check the frequency of such loan applications. If the percentage of unsecured loans is higher than that of secured loans, a lender is likely to flag you as a weak candidate on financial basis.
If you have availed too many loans during the past, irrespective of whether you have paid all of them on time, banks will not approve your loan application as they deem such individuals as credit hungry. Even though your past credit record is clean, you will be considered as a risky candidate who can default at any time.
Instability in your job can also impact your credit score. Even if you have a good credit score, your frequent hopping or instability in your job can negatively affect your loan application.
If your loan application has been rejected previously then this information is available both with CIBIL and your lender. When the borrower applies for a fresh loan, this history is pulled up by the new lender. This 'Rejected Loan' information can even weight-out an improved credit report and your credit score of the borrower resulting in his/her loan rejection.
It might look strange, sometimes living in a 'high-risk' locality can also be a reason for your loan rejection, despite having a good credit score. Almost all the banks maintain a list of neighbourhood’s areas that have a high incidence of default. If you happen to live in that area, you might be automatically rejected even if you have a good credit score.
If you showcase all your savings to your lender, then they have a better chance to cross-check through your financial profile. However, if the borrower fails to submit a detailed financial profile containing their savings portfolio to the lender then your application may get rejected.
If the lender is unable to verify the borrower's key credential information, then also your loan application stands a chance of getting rejected. Hence, to avoid loan rejection, it is recommended to be actively involved in managing your financial profile. You should regularly keep checking your credit report and score and fix the errors, if any. When people apply for a loan, lenders evaluate their capability to repay through various factors such as income, age, job stability and their credit report. Due to the above-mentioned and other such factors your loan application stands getting rejected so take a note of the following points to sail through the loan approval process.