There has been a whooping increase in the Non-performing assets (bad loans) of the banks in the past couple of years. Hence they have become extra cautious while disbursing loans to the borrowers. They follow a rigorous process of evaluating the applicant. Several factors like the age, income, job stability and CIBIL score are considered to judge the ability of the borrower to repay the loan back. Even the slightest doubt about your creditworthiness may lead to a prompt rejection of the loan application.
If your loan application is rejected, it may be a serious blow to your financial plans, especially when you do not have alternatives to finance your immediate requirements of cash. But rather than dwelling on this unfortunate outcome it is better to find out reasons that have led to the denial. Try to pinpoint the cause of rejection and work on that area. A little effort can help improve your financial picture and make you eligible for a loan approval in the future.
Here are some most common reasons why your loan application might get rejected.
Poor credit history
All banks and financial institutions look at your CIBIL Score and CIBIL report to analyse the risk associated with approving your application. A low CIBIL score is a warning sign to the lenders that you may not be worthy of lending money. Most banks have a cut-off score, below which they out rightly reject the applications. Apart from the CIBIL score they also see the remarks on the CIBIL report. Foreclosure, bankruptcy and court judgements show you as a high risk borrower. Even defaults on previous loans, skipped EMI’s, late payments or pending credit card bills are strong reasons of rejection. Make sure you build an impressive credit history before you apply for a loan.
Too many borrowings
If you have taken too many loans in the past you are seen as a credit hungry individual who is overly dependent on borrowings. Irrespective of whether you were able to honour your debts or not banks maintain a distance from such high risk profiles. They feel that an over leveraged person may not be able to bear the burden of additional EMI payments. Even a high income figure does not give them enough assurance that you will not default in the future.
Your income is the key factor that influences a bank’s lending decision. Banks check your income to debt ratio to understand whether you will be able to honour the monthly repayment of loans. Adequately document all the sources of income and attach the tax returns of past couple of years to support as a proof.
Banks also place a lot of importance on the stability of your job. If you have switched several jobs in the past year, or if your job is temporary, banks may not be assured of a regular stream of income and you may not get an approval. Some banks even require you to be employed in a particular company for at least three years in order to be eligible for a loan. Banks even check the financial health of the company in which you are employed to assess your job security.
If your loan application got rejected in the past it shows up on the CIBIL report. This greatly reduces the chances of future loan approvals. If you are denied loan once it is not wise to keep applying for loans unless you have worked upon the reason of rejection. Each time you do so, banks make an enquiry of your CIBIL score, which causes a further dip in the score. If you know that bad credit history is the reason for rejection, then you should work towards improving your CIBIL score and wait for at least six months before making a fresh application.
Insufficient credit information
Your CIBIL score depends upon how well you have serviced your loan obligations. But if you never took any loans before, you will not have any records in the CIBIL report to prove that you are a dependable borrower. In this case you will not have a CIBIL score. Since banks have no way of judging your repayment behaviour chances of rejecting the application are high. You can start building your credit history by taking secured credit cards. Use them to make monthly purchases and pay of the bills on time. Timely payments on the credit cards will get recorded on the CIBIL report and help build your CIBIL rating.
If your loan application gets rejected the first thing you should do is to check your CIBIL score and get a copy of your CIBIL report. Analyse it and create a plan to improve your credit history. Get your finances back on track so that you are confident when you submit your next loan application. If the reasons for denial are not associated with the CIBIL report then make sure you work on them before submitting another loan application, otherwise a series of rejections will hurt your CIBIL score. All it needs is a little patience and commitment and you can ensure things to move in your favour.