9 Reasons Your Personal Loan Application Rejected Despite High Scores

A credit score is a 3-digit score, between 300-900, awarded to you by credit bureaus after evaluating your credibility. These credit bureaus study your financial records and other data to give you a score. Lenders usually approach these bureaus to fetch out your credit score every time you apply for a loan with them.

The credit score is one of the most critical parameters based on which your loan eligibility is estimated. Being an unsecured loan, not supported by collateral, a credit score becomes an even more important factor in evaluating your eligibility.However, it is not the only factor. Your credit score could be considerably high, but you could still face a loan rejection. That's because lenders look at various elements before approving or rejecting your loan application. 9 Reasons for Personal Loan Rejection Inspite of High Credit Score

• The Company You Work With Lenders prefer borrowers who have a steady income and work in a reputable organisation. Today, most lenders have already segmented companies into various categories or grades from high or most reputable to least reputable. Working for a reputable company can automatically boost your chances of getting your loan approved compared to someone who works in a company that falls in the low category.
• The number of years of Experience You Have It is not just the company you work with but the total years of experience and the number of years you have already spent in the current company that defines your income stability. As you spend more time in a company, your chances of generating a regular income increase.

1. The Duration of Loan is too Low Personal loan duration can range between 1-7 years. While it is preferable to keep the period as short as possible, sometimes keeping it too low may also hinder you from qualifying for the loan. Although lesser duration means lower interest outgo, it also translates into higher EMIs spread over a relatively shorter duration. Make sure you can comfortably afford the EMI without putting stress on your finances.Moreover, you can always opt for prepayment or pre-closure of your loan if your finances allow you. However, do note that you’ll be liable to pay a charge for pre-closing or pre-paying your principal amount.
2. Your Income is Low While your credit score might be high, low income can still impact your loan eligibility negatively. Most lenders will look at your income per month to estimate your repayment capacity. Moreover, lenders usually have a minimum income limit which could be in the range of Rs 25,000 to Rs 50,000 depending on the lender you choose. Thus, if your income is lesser than the minimum limit, your loan application can be rejected irrespective of your credit score and the loan amount you apply for.
3. You have Existing High Debts Your repayment capacity is inversely proportional to the amount of EMIs you already pay on your existing debts.Debt to Income or DTI ratio helps lender ascertain how much part of your income goes towards paying off existing debts. Similar to FOIR (Fixed Obligation to Income Ratio), it is the ratio of your EMIs to your salary.Let's understand this with an example, Ravi's income is Rs 1,00,000 per month, and he pays EMIs of Rs 30,000 every month. Thus, his FOIR is 30%.What's a good FOIR would depend on the lender you choose but generally, it can be categorised as mentioned below;An important thing to note here is that FOIR is calculated after considering the new EMI's impact (if you get the loan) on the FOIR.Thus, let’s say Ravi (in the example above) applies for a personal loan for which the EMI is Rs 20,000 per month; this is how his FOIR would look like.
4. Lack of Stability of Income Lenders also like to gauge the stability of your income to ascertain your repayment capacity. If they fid that you don't have a stable income, they will most likely reject your application. To ascertain this, they do a background check on you and the company you work with. Two primary factors that are responsible for your approval or rejection of your application are;
5. Your Age is High While personal loans are relatively shorter duration loans than other loans such as home loan, your age still plays a crucial role in determining your eligibility. Most lenders have a pre-set age limit for availing loans, usually in the rage of 23-60. Thus, if you're nearing your retirement age, you may find it tougher to avail of a loan as compared to someone in their 30s.
6. Questionable Credibility of Guarantor or Co-applicant Most lenders allow you to add a guarantor or a co-applicant to your loan . Firstly, do note that there is a big difference between a guarantor or a co-applicant. While the co-applicant may also share the EMIs, a guarantor comes into play if you fail to pay the EMIs. Whether it is a co-applicant or a guarantor, both act as a back-up if you default on the payments.Thus, lenders scrutinise the guarantor's and the co-applicant's credibility before granting the loan. To ascertain this, they will look at their financials and other records just the same way they would check yours.
7. The Loan Amount Is too High You might have done everything right, but you could still face rejection. And the reason could be a high loan amount. You can take personal loans of amounts up to Rs 50,00,000. However, the loan amount you apply for should match your repayment capacity, as discussed above.
8. You have Applied for Loan at Multiple Places While your credit score may be high, applying for a loan at too many places can also impact your eligibility. Borrowers often make the mistake of shopping around and applying for loans at multiple places to get the best interest rates and terms.However, this shows to the lender that you are desperate for your loan. In fact, this can also lower your credit score. While it is good to shop around and look for the best deal on loans, make sure you shortlist the lender before applying for the loan.
9. You don’t have an Existing Relationship with the Lender While this is not an essential factor, it can still play a role in determining your eligibility. If you're already hanging on the edge of rejection, this can push your loan application to the other side. Lenders might be ready to compromise on a few other factors slightly if you are an existing customer.

It is essential to understand that no single factor is looked at in isolation by lenders when evaluating your eligibility. While lenders may give some points more weightage than the others, they all come together to help lenders determine your credibility and repayment capacity. Thus, make sure you focus on all the factors when applying for a personal loan and not just your credit score.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.