Planning to apply for a loan? Or if you have unsuccessfully applied for one, are you wondering why your application was rejected? Applying for a loan seems a straightforward thing to do but many people unknowingly reduce their chance of securing a loan by making some very avoidable ‘loan mistakes’. What are some of the things that can trip up your application? And more importantly, how can you avoid them when you next apply for a loan?
Credit, if rejected when it is needed the most can have serious consequences. Imagine your dear one is in the hospital with a medical emergency and you urgently require a loan after exhausting your mediclaim limit. If in such situations your loan gets rejected, it may add to your mental and financial stress. Or you might have finalized a home to buy but your home loan gets rejected. These are some of the examples which can have far-reaching consequences.
We spend a lot of time with clients who come to us for their Credit Improvement or who ask us credit related questions over our forums on Facebook, Twitter and here. One among the frequently asked questions is over loan rejection and the reasons for it. We have come across many of the reasons due to which a loan application may be rejected. After carefully analyzing all of them, we have come down to the 4 most common reasons due to which a loan application may be rejected.
Read on to find out more.
Not checking your credit score
One of the main reasons banks turn down a loan application is because of a low credit score. Many customers are simply unaware of their credit score when they apply for a loan and find out to their dismay that that is the reason for the rejection. Lenders typically look for a credit score of 750 or above when reviewing a loan application, so it is advisable to make sure that you have a good credit score before you apply.
Checking your credit score is very easy. You could either check your credit score right here free of cost on our website or even check with the Credit Bureaus. As per the RBI mandate, they offer free scores once a year. In addition, you could avail their membership services too which come as various subscription plans. Checking your credit score at least once in a time gap of 3-6 months is a good practice. This will allow you to regularly monitor your credit score. If the need be, you can focus on improving it before you apply for a loan.
Not Assessing Your Income And Repayment Capability
Each loan is approved on the hope that the same will be repaid promptly. To be able to judge if you can pay back on time, one of the things that banks assess is your credit score. In addition to your credit score, the banks/lending institutions also need to review your income and repayment ability. If the income doesn't match up to the amount of loan applied for or if the repayment capability seems low due to pre-existing borrowings, then your loan application might be rejected.
In such cases, you could either lower the loan amount applied for or wait till your income goes up to match the loan. For Ex: A person new to the workforce may have problem getting a home loan sanctioned, as it is a big-ticket long-term commitment. The same may be approved a few years down the line.
If your repayment capability is used up by other loans, then it is good to clear some of them by prepaying or wait till you finish paying those EMIs. Normally, banks do not allow more than 40% of your take-home income as EMIs.
Additional Reading: Benefits of Prepaying a Personal Loan
Making Multiple Loan Applications at the Same Time or Within a Short Time Frame
This is another very avoidable loan mistake. If you are looking for a loan and not sure if you will be approved, it might seem logical to apply to multiple lenders to maximize your chance of being approved by at least one of them. Did you know, this will actually harm your chances of being approved by any of them? Every time you apply for a loan, it is recorded in your credit report as a hard inquiry.
When a potential lender sees that you have made multiple applications to various banks, they become nervous that you are ‘desperate’ for credit and need to apply to several sources of credit to fulfill your needs. To avoid this problem, make sure that you research the loan offers available, and only make one application where you think you have the best chance of being approved.
Applying too soon after a rejection may not always result in approval. This too may be the reason for loan rejection.
So if you loan application is denied, wait for some time till you analyze the reason for rejection and apply only after you are sure that you have taken corrective measures.
Additional Reading: How does hard inquiries affect your credit score?
This is another common ‘loan mistake’. Often, applications are turned down simply because the documents are not filled in accurately, or there is a mismatch in the information provided, or the requisite documentation is not submitted. This is an easily avoidable mistake and all it requires is a little planning.
To avoid facing loan rejections due to incomplete documentation, it might be a good idea to get a list of documents from the bank before you submit your application. And tick off the list before your submit your completed application.
So next time you plan to apply for a loan, keep these four factors in mind to help increase your chances of being approved.