“I was told if I had an excellent CIBIL score, there was no force in world to stop me from getting a loan. What’s more, I worked really hard to get my ranking to its current shape and for what? Did I misplace my faith in CIBIL? Why can’t there be any transparency in the banking system?” – Have you felt similarly? Unfortunately, this is not an uncommon situation among loan seekers.
There is complete truth in the statement that CIBIL is crucial to your loan application. However, it is not the entire truth. A credit score is not the one and only key to getting a loan. Banks and non-banking financial institutions weigh other factors, too. A person’s income, job stability, repayment potential (measured by CIBIL) and certain other factors influence the final approval. Let’s look at some of the common reasons for which a loan application may get rejected:
- Does your present income support another loan?
Of all the reasons that may rule against your favor for a loan, your debt to income (DTI) ratio may be the strongest culprit. Banks look at how much your income (I) you are utilizing to service loans (D) already. If your income is already stretched, then there are high chances that your loan may not meet approval criteria. The DTI ratio gives banks an indication of whether you will be shell out more from your income to meet the EMIs of the new loan. It is wise to keep the DTI below 50%. So, if you’ve taken unsecured personal loans, which normally have high interest rates, it would be advisable to pay it out in full before you approach a bank for another loan.
- Unflattering remarks in your CIBIL report:
So, you’ve really toiled to repair the damage to your CIBIL rating. You’ve looked for ways to resolve all kinds of issues on your CIBIL report, and then worked some more with a credit repair agency to improve CIBIL score. And still, you find yourself staring at disappointment after your loan has been rejected. Why, you might think! Could this be because of mistakes in handling credit dues in the past? Your credit report captures the status of assets of the reporting bank / lending institution. You may not have been able to pay off a particular loan in the past and that got recorded against your name as “written off” or “settled”. Usually, it takes up to 7 years for old records to stop reflecting in your credit report. However, till such time, whenever a lending institution makes an enquiry into your credit history, such statuses will show up and this may affect their decision to grant you a loan.
- You are a new tax payer:
If you have only recently started to pay taxes, you may be hard pressed to convince banks of your tax paying abilities. You would need to show at least two years’ worth of tax paying history to have your loan approved.
- Data clashes in defaulter’s list
There is no official CIBIL defaulters list; but, banks definitely keep a record of defaulters. It could turn out that you share address or phone number details with someone who is already listed among defaulters. Banking software may raise a red flag when you provide your personal details, matching your address to the one that already exists.
- Bank / NBFC Policy
If you have availed too much credit in the past one year, you come across as credit hungry and you are seen as a potential risk to lend out more loans to. A few lending institutions have an inbuilt policy that rejects applicants who have taken loans in the immediate past. If you are one among them, then this may be the reason why your loan got rejected.
- Unstable job history
Changing jobs frequently is not seen favourably by bankers, when it comes to granting loans. Most lenders like to get a feel of your job security before they extend credit. It helps to show that you have been stable at your current job for about 2 – 3 years, else it becomes a good motive to turn down loans.
- Previous loan rejection:
Every time you apply for a loan, it gets recorded in your CIBIL history. If there have been rejections in the past, it will affect your chances in the present and future. It pays to be sensible when applying for a loan.
By Team Credit Sudhaar.