In deciding on your creditworthiness, your credit score plays a very important role. It helps lenders decide whether or not to approve your application for credit. Your loan application will be accepted easily if you have a good score, and you will also be eligible for favorable terms and conditions on it. If you don’t have an ideal credit score, on the other hand, so no lender will be prepared to lend you because they doubt your ability to repay you.
But what if you have a decent credit history and your application for a loan has been rejected? The response to this question is clear because when determining your loan eligibility, lenders don’t just consider your credit score. Your score just informs them about your financial health, repayment capacity, current debts, and other information like that. Some of the reasons why your loan may be denied despite having a great credit score are given below:
- Remarks in Your Credit Report: Your credit report consists of any other findings or statements made by your lenders or credit card issuers, apart from the credit score. If you have settled a loan with the bank on conditions other than those agreed, it will be reflected in your report and work against you. In approving the loan application, the bank takes derogatory statements such as “written off”, “settled” and “days past due” very seriously.
- Guarantor for a Defaulted Loan: The person who is accountable for making loan repayments on time is a guarantor. If you were a guarantor on someone’s loan and failed to make timely payments, your credit score is also going to take a hit.
- Details matching With a Defaulter: Defaulter: Many financial institutions maintain databases that include the name, age, address, current work, and other information of people who have defaulted on their payments. If you are on the list of defaulters, long before the bank reviews your credit rating, your loan application will be rejected.
- If You Are Overleveraged: If you have multiple existing loan commitments and spend a substantial percentage of your monthly income on servicing your current debt, banks will regard you as ‘potential defaulters.’ They are going to question your ability to afford further repayments of loans.
- Inappropriate Tax Paying History: In general, banks favor applications from persons who have been regularly filing their tax returns on income for at least two years prior to applying for any loan. The creditworthiness of such individuals is easier to assess since there is an existing background apart from the credit score that can assist lenders and lead them in the right direction before lending them to understand their creditworthiness.
- Taking Too Much of Unsecured Loans: The essence of your past loans is reviewed by most lenders to see whether they have been secured or unsecured. In reality, if the loans that are backed by any security or collateral are secured, banks show less concern. However, lenders verify the frequency of such loan applications if the loans are unsecured. On a financial basis, if the percentage of unsecured loans is greater than that of secured loans, a lender is likely to flag you as a poor candidate.
- Over-borrowing: If you have used so many loans in the past, regardless of whether you have paid them all on time, banks will not accept your loan application because they consider those individuals to be greedy for credit. You would be considered a risky candidate who can default at any time, even if your past credit record is clean.
- Instability in Career or Company etc.: Your credit score may also be influenced by uncertainty in your career. Your constant hopping or uncertainty in your job will adversely affect your loan application, even though you have a strong credit score.
- Loan Rejected Before: If your loan application has previously been denied, then both CIBIL and your lender are available with this detail. If the borrower applies for a new loan, the new lender brings up this past. This ‘Rejected Loan’ data can also weigh an enhanced credit report and the borrower’s credit score, resulting in the rejection of his / her loan.
- Living in a Particular Postal Code: It can look odd, although having a good credit score, living in a ‘high-risk’ area can also be a reason for your loan rejection sometimes. A list of neighborhood areas that have a high incidence of default is maintained by almost all banks. If you happen to live in that place, even if you have a good credit score, you may be automatically rejected.
- Demonstration of Your Savings: If you present your lender with all your investments, they have a better chance to cross-check your financial profile. However, if the borrower does not send to the lender a detailed financial profile containing their savings portfolio, the request will be denied.
- Unable to Verify Your Credentials: If the lender is unable to check the key credential data of the applicant, then the loan application also has a risk of being denied. Therefore, it is advised to be actively involved in handling your financial profile to prevent loan rejection. You should keep reviewing your credit report and score periodically and, if any, correct the errors. Lenders assess their ability to repay by different variables such as wages, age, job security, and their credit report when people apply for a loan. Your loan application is being denied due to the above and other such reasons, so take note of the following points to work through the loan approval process.