Does Canceling a Loan Affect Your Credit Score?

When a lender extends a loan, they take some risks doing so because there are chances of the borrower defaulting either the entire loan amount or part of it. Hence, before approving your loan application, the lender checks your repayment capacity to ensure you repay the loan on time.Lenders use various elements to assess your repaying capacity. The most influential among them is your credit score, which indicates your creditworthiness. A decent credit score is necessary when you apply for Home Loans and unsecured credit like Personal Loans. If your credit score is below the required threshold, the lender might either demand a higher interest rate and fees, or deny your application.A few factors that can affect your credit score are as follows:

• Your payment history
• Your financial obligations
• Length of your credit history
• Errors in your credit report
• The types of credits you have

If you are wondering if cancelling a loan application after approval will affect your credit score, read on to know its implications in detail.

Cancelling a loan application after approval is challenging, but not impossible. However, you must do so before the loan disbursement. Usually, withdrawing a loan application after it has been approved can attract certain penalties, which vary from lender to lender. Hence, read the terms and conditions of the loan before applying for it. Cancelling a loan application after the lender deposits the amount into your bank account is impossible.

If you would like to cancel a loan application before the funds are disbursed, you should follow these steps:

• If you have decided to cancel your loan application , you should contact the lender as soon as possible to inform them about your decision. A delay in doing so may lead to complications.
• Your lender will ask for all necessary information regarding your loan application. Provide them with the required information promptly.
• You may need to submit a loan cancellation letter or application to support your cancellation request. Remember to include the reason for cancellation and your loan application details in the letter and keep a copy in your record.
• If necessary, visit the nearest branch of the lender to complete the application process. Usually, a customer service representative will guide you through the cancellation process.
• Remember to follow up with your lender to ensure your cancellation request has been successfully processed.

If you have applied for an instant Personal Loan, a lender representative will contact you before disbursing the loan amount. You can cancel the loan at this point if you wish to do so. If your loan account is managed by a loan manager, you can contact them to initiate your loan cancellation process. Also Read: Home Loan Sanction Letter & Its Importance

When you apply for a loan, the lender accesses your credit report to assess your repayment capacity. In the financial world, such investigations on your credit report are called hard inquiries. Remember that lenders perform hard inquiries before approving the loan. Each hard inquiry slightly lowers your credit score . However, this impact is short-term and may diminish within a few months.If you are cancelling a loan application immediately after the form submission and before the hard inquiry, the cancellation will not impact your credit score.However, if you plan to cancel the loan after the disbursal, it will lead to foreclosure. A loan foreclosure is also considered an account closure. Account closure shortens your account history and reduces your credit limit, potentially impacting your credit utilisation ratio.While calculating the credit score, credit bureaus consider only your open accounts. Foreclosing a loan is different from paying off the dues on your Credit Cards. With Credit Cards, keeping the card active even after paying the balance retains an open account. Your credit line remains unaffected even if you do not use the card. Also Read: What Happens if I miss my Home Loan EMI Payment?

There are many myths regarding Home Loans that can lead you to uncertainty about applying for one, leading to cancellation and unnecessary impact on your credit score. Let us debunk some common myths about Home Loans and learn the reality behind them.

Myth 1: Home Loan overdraft facility provides unlimited access to funds.

Reality: No doubt, the overdraft facility provides flexibility in accessing additional funds; however, they are not unlimited. The lender predetermines the overdraft limit. Typically, it is calculated as a percentage of the property value or outstanding loan amount. The upper limit of the overdraft facility depends on your income, creditworthiness and other factors the lender considers during the loan approval process.

Myth 2: You can only get a Home Loan if you have an ITR or your ITR shows a high income.

Reality : In India, most lenders prefer applicants with a regular ITR for Home Loans as it helps them to quickly assess their repayment capacity. However, many financial institutions now provide Home Loans without ITR if your annual income is below the tax threshold. You can apply with a co-applicant who is a regular taxpayer with a good credit history to meet the income requirement of the lender.If you are a self-employed person, then instead of ITR, you can submit other documents to establish your income, such as bank statements, financial statements of the business, etc. These documents help lenders assess your repayment ability. Many lenders offer Home Loans without ITR; however, the interest rates of these loans will be higher and they may have stricter terms.

Myth 3: A sales deed is the same as a Home Loan agreement.

Reality : A sales deed and a Home Loan agreement are different documents. A sales deed is a legal document that confirms your ownership of a property. Conversely, a Home Loan agreement is a contract that states the loan's terms and conditions and establishes the obligation between you (the borrower) and the lender.

Myth 4: The retail prime lending rate determines the interest rate for all Home Loans.

Reality : The retail prime lending rate is the benchmark rate based on which lenders determine the interest rates they charge from customers. However, Home Loan interest rates are based on various other elements, such as your credit score, loan amount, down payment, lender's policies, and other factors. Also Read: Link Understand the advantages and disadvantages of Home Loans.

Most lenders allow you to cancel your loan application before the loan disbursal. However, if you cancel the loan after approval , you may be required to pay cancellation charges to the lender. Furthermore, the scope of loan cancellation entirely depends upon the policies of the lender. Hence, read the terms and conditions of the loan before applying for it. Note that a loan cancellation after its approval can influence your credit score; however, this impact will be short-term and will be largely inconsequential.Now that you know how to cancel a loan application without long-lasting consequences, you can move ahead with your credit journey. Aditya Birla Capital offers various Home Loan and Personal Loan options to meet your unique needs.