Credit is an important part of any financial plan. It can help you achieve many ambitions of yours, which may be difficult just with your savings, such as buying a home a or four-wheeler, or getting a degree.
It is simple to understand that your might not application get approved every time you apply for credit. Though rejection feels bad, you must go deeper and find out the cause of rejection so that you do not commit the same mistake again.
Some of the common reasons for loan rejection are:
Bad Credit Score: Your credit score is an indicator of your creditworthiness and it can be the only way of predicting your future behavior with credit. Therefore, a good credit score is a non-negotiable element determining your loan approval.
Additional Reading: Looking for a high credit score? Here's how you can achieve it
Insufficient income to support the loan: The amount being applied for in the loan has to be in line with your income so that you can comfortably repay the amount. If you apply for a high loan amount that would be difficult to be supported with your income, then it comes across as a case for loan rejection.
Imbalanced Credit Mix: When your lender looks at your credit report, they look at your credit mix. This is nothing but the mix of secured and unsecured loans in your overall credit portfolio. Lenders prefer to lend to individuals who have a healthy mix of both, as against the individuals who just have more of unsecured loans, which is construed to be a credit hungry behavior.
Employment issues: Certain employers are blacklisted or are counted as less-preferred employers due to varied issues. If you are employed with any such company, your loan application may end up being rejected.
Insufficient/ Incorrect Documentation: Proper documentation is of great importance for securing an approval on credit. Other than your credit score, your documentation forms the basis on which lenders can base their decision on. So, when the documents submitted are incorrect or portray different facts than what is shown on your credit report/ elsewhere, there are chances of your loan getting rejected for that reason.
Hard Enquiries: Every time you apply for any credit, your lender approaches the credit bureau to check your credit history. Each of these inquiries are recorded against your PAN. These inquiries are called as Hard Enquiries.
When there are a number of hard inquiries in a short period of time, it reflects adversely on your credit health as you are construed as a credit hungry person.
Additional Reading : Does Checking your Credit Score often bring it down?
How Does Loan Rejection Impact Your Credit Score?
After having known the possible reasons for loan rejection, let us see how rejections due to each of the aforementioned reasons could affect your future credit score.
Loan Rejection Due to Bad Credit Score: Bad credit score is one of the main reasons for loan rejection. If you have experienced this, you must be thinking if it will impact your credit score in future.
There is no straight forward answer to this. If you have realized the reason for loan rejection and not tried to immediately apply for credit again, then your credit score will not get impacted. In your best interest, it is better to monitor your credit score and ensure it has moved up to the level required before applying again.
Additional Reading: Know more on factors that do not affect your credit score
Loan Rejection due to Insufficient Income: If your loan has been rejected due to issues with your income level, it is better to take a moment and think if you would have been able to handle such a big EMI with your current income.
The loan rejection here would not affect your credit score adversely unless you try applying with another lender/ different loan with the same lender. It is good to either wait till you have a sufficient jump in your income or reapply with a smaller loan amount which would have greater chances of approval and also not hurt your credit score.
Loan Rejection due to Imbalanced Credit Mix: Every lender looks to lend to a responsible consumer. If you are someone with a lot of unsecured credit like credit cards or personal loans without any secured loans (Home loans, gold loans, etc), it would put the lender in an uncomfortable position approving your loan, especially another unsecured loan.
In such a scenario, there would not be any immediate impact on your credit score unless this is among is one among many of your attempts to get a loan. The best alternative for you here would be to close a couple of your unsecured accounts and then try getting a loan.
Loan Rejection for Employment Issues: If you have been rejected a loan due to employment issues, it should not bear an impact on your credit score. However, if you know the reason for rejection, it might be futile to keep applying for the same loan with other lenders.
Your credit score takes a drop if you try applying multiple times over a short period of time.
Loan Rejection due to Incorrect/ Insufficient Documentation: Loan rejection on account of documentation errors is not a grave problem. Neither does it have a bearing on your credit score. The officials dealing with your loan documents should be able to help you out with the right documentation required for clearing the loan.
In case you do not have the documents ready, it is good to wait until you get those documents rather than reapplying in a haste.
Rejection due to Increased Number of Hard Inquiries: Increased number of hard inquiries is the most serious of all the reasons for rejection of a loan. As you have learned earlier, increased number of hard inquiries mean that you have been applying frequently for loans or other forms of credit.
Another loan rejection on the back of existing hard inquiries will only add to the existing woes and further lower your credit score.
Have you noticed one common factor in all these cases of loan rejection? Loan rejection by itself does not impact your credit score in many cases. It is only when you keep applying for credit again and again, is what causes more harm to your score.
Therefore as a end note, we would like to restate that apply for credit only when you are in need and only as much as you can comfortably pay off.