Archana Bhardwaj, a school teacher, was shocked when her loan request was rejected that despite having a good credit score. Ever since she learnt about how much importance is given to it 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 the 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 healthier chance of getting that loan amount sanctioned.
Why was your loan application rejected?
Not Meeting the Income Criteria:
Every lender will have their 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.
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 job frequently, getting the loan approval can be a far-fetched dream.
Debt-to-income ratio is the percentage of your income spent on repaying debts like your EMIs and credit card bills. A percentage above 40 is a red flag for lenders, as it would mean that the applicant would be in 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.
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.
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.
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.
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.
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.
Well, after stating all these, we do not want you to have an impression that 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.