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Five reasons why banks can reject loan

Last updated on: May 20, 2011 10:14 IST

Five reasons why banks can reject loan

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Most of us are now aware of some of the critical reasons a bank might refuse a loan and gear up for it well before a loan needs to be sought.

This is very true in the case of a home loan, which requires preparation on various fronts.

You are likely to pep up your credit score, ensure you pay your credit card dues in full, on time, increase your income levels, close out previous loans, etc, in preparation for the loan you plan to apply for.

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Image: Customers should do homework before applying for a loan.

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Five reasons why banks can reject loan

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However did you know these are the not the only reasons you might face a loan rejection for

There can be others for which you may not be directly responsible.

Yet you need to be aware of them to understand how you can tackle the issue if it arises in your case and obtain a loan without any hassles.

The views expressed in this article are based on logical underwriting principles as applicable in the US, European and Indian markets and are not reflective of any particular institution.

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Image: Be aware of rules before applying for loan.

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Five reasons why banks can reject loan

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Job-hopping

You are a compulsive impulsive job hopper who does not stay in a job for more than six months.

It is quite a common practice with the current generation to switch jobs often. This in the bank's book implies instability and will be a good reason to reject your loan request.

Banks place a lot of importance on job stability and certain banks even insist that an applicant needs to be employed with a particular concern for three years or more to be eligible for a home loan.

Also, in instances where a reputed company's future appears unstable, the bank can reserve its right to provide a loan to the applicant from that company.

Tip: Remember, constant job shifts may affect your credit worthiness.

Try to stick to a company for a minimum period of a year if you plan to apply for a loan or shift post your loan sanction.

Even this time period is only fine during the initial years of your career. As you gain experience its augurs well for you to have a longer stint at the companies you work for to account for job stability.

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Image: Job-hopping can hurt your loan chances.

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Five reasons why banks can reject loan

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Residential address

Your residential address is on the defaulter list.

If you live under the same roof as someone who has slipped up on a loan payment or credit card dues and hence been reported to CIBIL, then the probability of your loan application to be rejected is likely to be high.

The reason being your residential address will find a match with the one on the defaulters list.

This also holds true in the case of a family member who resides in the same address.

Tip: Take this issue up for discussion with your relationship manager at the bank. Indicate that the previous tenant (if that is the case) does not have a personal relationship with you.

In the case of a family member you need to stress that he or she is not dependant on you.

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Image: Check that your address is not on the defaulter's list.

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Five reasons why banks can reject loan

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Profile

Your profile doesn't fit into the bank's internal policy.

Each bank is guided by its own internal policies. If some credit profiles or geographic areas are listed in their policy guidelines as negative for lending, the bank will not be able to fund your loan.

Tip: In case your credit profile does not fulfill the criteria of your bank, you can take it up for discussion and provide additional security either in the form of a guarantor or in the form of insurance policies, fixed deposits, collateral securities etc. or provide proof of your repayment ability (for e.g. if you run your own business).

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Image: Your profile doesn't fit into the bank's internal policy.

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Five reasons why banks can reject loan

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Property

If the property is outside the geographic limits specified by the bank, try applying to the nearest bank or branch.

Also, check if the option of providing additional security is available.

You want a loan to purchase an old building.

As a rule a bank will not fund for old buildings, especially if it is more than 20 years old. This criteria (age of the building) varies from bank to bank.

Tip: Land value will be always considered. Try to increase the down payment and add in some form of security to negotiate for a lesser loan amount.

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Image: As a rule a bank will not fund for old buildings.

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Five reasons why banks can reject loan

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Rejection

Your loan application has been rejected before.

Most banks have records of all rejected loan applications in their database. When you apply with a bank, this will show up in your credit profile check and could pose a problem as it affects your credit worth.

Tip: Remember it is not a wise thing to keep applying for a loan without any rhyme or reason. You will not be able to keep track of why you have been rejected.

So weigh the pros and cons before you apply for a loan simultaneously to different banks.

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Image: Banks have records of all rejected loan applications.

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It would be best to wait till you know you cannot receive an offer before you apply to another bank.

This will give you a chance to rectify errors or update your credit record in case there is an issue with it before you approach another lender.

In the same vein, if the reason for your previous loan rejection is something other than a default, you can take it up with the credit manager explaining the exact reason for the rejection.

In genuine instances, the bank could reconsider its decision.


Image: In genuine cases, banks can reconsider their decision.

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