6 reasons your loan got rejected despite a 750+ credit score
A high credit score is a desirable "must have" in the eyes of the lending bank, yet it is not a sure fire guarantee for getting a loan approval. Lenders consider a host of factors before granting any loan. The parameters and criteria to determine the eligibility and quantum of loan differ from one lender to another.
Vinay Bajaj, 32, is a freelance graphic designer. He had a good profit making business, pays all his bills on time, pays his taxes, invests his money, enjoys a good credit score... in short, he does all the right things where money matters are concerned. Yet, when he applied for a home loan, his application was rejected. In spite of having a credit score of 790, Vinay could not get a loan from the bank.
CIBIL credit score is probably one of the most important factor that helps decide banks on your loan application. However, a host of other factors go behind your loan application approval process. Let us have a look at the possible reasons for rejection of Vinay's loan.
1. Derogatory remarks on your CIBIL Credit Report
You credit report is plagued with derogatory remarks such as "Written Off" and "Settled" status. Banks and financial institutions are wary of giving loans out to individuals who have such derogatory remarks on their report -- these remarks indicate that you didn't make the payment in past or when you did make the payment, you only settled with the bank (that is again did not pay in full).
A lot of banking agents will insist that you go with a "Settlement" with a bank as you don't have to pay the full amount, but you should never get lured and always go for a full closure.
2. You are overleveraged
Banks look at a very important metric called debt to income (DTI) ratio before sanctioning you a loan. Debt to income ratio measures how much of your income are you using for EMI payments. Higher debt to income ratio indicates that you are already overleveraged and will not be able to bear burden of additional EMI payments. You should always try to keep your DTI ratio to less than 50 per cent.
3. You have availed too much credit in last one year
A lot of banks have an internal policy where they do not give out loans to individuals who have availed one too many loans in previous one year. One such NBFC (non-banking finance company) has a policy where they will deny personal loan to any individual who have availed a personal loan in last 3 months.
4. You may have guaranteed a loan that has defaulted
As a guarantor of the loan you are equally liable to pay the loan as is the borrower. If the loan you have guaranteed is showing a late payment pattern or has been settled by the back with partial repayments, this will affect your loan application too.
5. You do not have adequate tax paying history
Banks usually need at least two year worth of income tax to be filed by the borrowers they consider favourably. If for any reason you have recently started filing returns then the bank may reject your loan application.
6. Bank's database has matched you with a defaulter
Banks usually carry a negative list of areas -- areas in which they are reluctant to give out loans. They also have a defaulter list of sorts -- a list that has names and addresses of previous defaulters. You may have recently moved houses and the previous owners may have had a rotten credit history. The database of banks may automatically connect your addresses and ping you as a bad credit risk causing a rejection by the bank.
The author is Co-founder and Director Credit Vidya.