No one can predict when a financial crisis will appear and hamper the finances of an individual. Under such circumstances, availing a loan is the ideal option. Loans are available in two different types including secured credit options like property loans, housing loans, etc. and unsecured credit options like personal loans, business loans, etc.
Borrowers can freely choose a credit option based on their needs and affordability. However, due to some negligence, borrowers face loan rejection from lenders. Keep reading to learn about the reasons for loan rejection and its remedy.
What are the common reasons that lead to loan rejection?
Since everyone learns from their mistakes, knowing about the reasons for loan application rejection may help borrowers make sure that they do not repeat the same blunder:
- Poor credit score
This is one of the most crucial factors that cause loan application rejection. A borrower’s CIBIL score ranges between 300 and 900, which indicates their creditworthiness in the eyes of lenders. If the borrower retains a poor credit score between 300 and 500, the lender might charge a high-interest rate or simply reject the application request. On the contrary, if anyone has a credit score of 800 or above, the chances of getting loan approval also increase.
- Many outstanding loans
This is one of the most notable reasons for loan rejection. An individual’s loan or credit card application might be denied by the lending institution if that person’s prevailing debts and other liabilities consume a substantial portion of his/her income.
To avoid denial of loan application, it is recommended to keep the existing debts to a minimum and to set at least 50% of the monthly salary aside. Furthermore, it is sensible to avail loans only during emergencies so that individuals get sufficient time to repay them on time.
- Several loan inquiries
Often, people apply for multiple loans whimsically from different lending institutions. While doing so, borrowers sometimes forget that each time they submit a loan application, the financial institution will check their CIBIL score and ask for a copy of the credit report from the credit bureau. On checking the reports, the lenders will doubt the borrower’s financial credibility and reject him/her from the current loan application by considering it as credit-hungry.
- Income requirements not fulfilled
Lenders want to make sure that they get the repayment of the entire loan amount within the predetermined tenor before approving a person’s loan application. They also assess the applicant’s monthly income to ensure whether they have the stability to make timely loan repayments.
With a stable and sufficient income, an individual can easily pay back his/her monthly instalments on time. For salaried and self-employed persons, lenders have set a minimum income requirement. If anyone fails to fulfil that criteria, his/her loan application might be rejected.
- Not fulfilling the eligibility criteria and documentation
Most of the lending institutions have set certain eligibility parameters which applicants have to meet before availing a personal loan, home loan, business loan, LAP, etc. Although these criteria vary among lenders there are still some parameters that remain mandatory. These include age, income, employment, citizenship, etc.
Anyone unable to meet these parameters will be rejected from a loan application. Furthermore, to avail a loan, borrowers have to submit documents required for home loan. If any document is invalid the applicant’s loan request will be denied by the lenders.
How to avoid rejections on loan applications?
Applicants can adopt several measures to make sure that their loan applications do not get rejected:
- Maintaining a low debt-to-income ratio
Borrowers having a low debt-to-income ratio signify that their net monthly financial liabilities are lower than their income, thus showing a reliable loan repayment capacity from their end.
- Retaining a high credit score
Although the CIBIL score rating for various loans is different. This is why it is recommended for borrowers to retain a healthy credit score of 750 or above.
- Repaying loans and credit card payments on time
Another great way to stay away from loan rejection is the repayment of previous loans and outstanding credit card payments on time.
- Keeping the credit utilisation ratio below 50%
While opting for credit cards, borrowers should make sure that they keep their credit utilisation ratio below 50%. This means if their credit card limit is Rs.100000, they must keep their usage below Rs.50000.
- Having a proper employment
Individuals having proper employment and a stable source of income can easily opt for a loan application whenever they need it.
- Avoiding the application of too many loans
Another excellent way to stay away from loan rejection is to avoid taking too many loans simultaneously. This is because it reflects a person’s credit-hungry nature to the lenders and the latter might deny their loan request.
Many reputed financial institutions provide pre-approved offers on various credit options like personal loans, business loans, home loans, LAP, etc. Due to this, the overall process of lending is accelerated. Individuals eligible to get the pre-approved facilities can check their pre-approved offers online by entering their names and contact information.
Knowing about the primary reasons for loan rejection alongside its remedial measures may help a borrower to avoid denials in their loan application. However, before availing a loan whether secured or unsecured, individuals need to visit the websites of multiple lenders and make their choice sensibly.
