12 Reasons Why Your Loans Could Get Rejected And How to Improve Your Creditworthiness

With the digitisation of banking products, applying for a loan has become a quick and convenient process. However, despite its simplicity, many individuals still face the issue of having their loan applications rejected. This can be discouraging as it may seem like a waste of time and effort. To avoid the disappointment of a rejected loan application, you need to understand the common reasons behind it. By gaining insight into the potential pitfalls, applicants can take steps to improve their chances of approval. This article elucidates the 12 key reasons that often cause loan rejection and also provides tips to make sure your application doesn't get rejected. Be sure to read on to the end to learn more!

1. Insufficient credit score and credit history:

Your credit score (a 3-digit number ranging from 300 to 900 that depicts your creditworthiness) and credit history play a crucial role in the loan approval process by banks and other lenders. It reflects how effectively you handle your credit. Maintaining a favourable credit utilisation ratio and making timely repayments can contribute to a higher credit score, making you a more desirable candidate for loans. Conversely, if you neglect these aspects, your credit score may suffer, resulting in a higher likelihood of loan rejection.

2. Your loan repayment capacity:

While having a good credit score is important, lenders also consider other factors when assessing loan applications. Your annual income and outstanding debt are also key considerations in determining your ability to repay the loan. If your income is insufficient to support the requested loan amount, lenders may reject your application. To minimise the risk of rejection, it is advisable to pay off as much possible existing debt and improve your income prospects.

3. Incomplete missing paperwork:

Lenders typically request various documents when applying for a loan, such as proof of identity, address, and income. The information provided on your loan application is critical in determining your loan approval, as banks rely on this data to assess your credibility. Your loan application may be rejected if any information or documents are missing. Besides, if there are discrepancies between the information provided and the supporting documents, your application could also be denied.

Loan applications are often rejected due to missing documents or incomplete information. Hence, you need to ensure that all mandatory details are accurately and thoroughly completed when filling out the loan application. Make sure you take the time to provide all necessary documentation and information to improve your chances of loan approval.

If your loan application is declined due to incomplete paperwork, you can resubmit the necessary details/documents. However, if the lender suspects that you intentionally manipulated the documents, or provided false information, you could be barred from reapplying.

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4. Your residential address:

Typically, your KYC documents serve as proof of your residential stability by verifying your permanent address in the city. However, if you are a tenant, the bank may require additional information. If the bank is unable to confirm your residential stability, your loan application may be rejected. Furthermore, if you reside in a region or area that falls under a negative zone or are listed as a defaulter area by the bank, your loan application may be rejected, even with a good credit score!

5. Job stability:

Banks and NBFCs consider your job stability when assessing loan applications. Some lenders may even require applicants to have worked for a specific company for a minimum of three years to qualify for a home loan. Moreover, if a particular company's future appears uncertain, the bank may reserve the right to deny loan applications from employees of that organisation.

6. Signature mismatch:

Many of us struggle with a consistent, perfect signature, which is required to remain the same across all documents. When applying for a loan, you must ensure that your signature on the loan application matches the signature on your other documents. Failure to do so can result in your loan application being rejected. Putting effort into creating a consistent signature that matches your other documents helps avoid any potential loan rejections.

7. Inaccurate credit report:

Your credit report can contain various errors such as inaccurate reporting of payments, errors in personal information, closed accounts still shown as active, and incorrect PAN details. These errors can lead to loan application rejections. Therefore, it is crucial to review your credit report for any inaccuracies and raise a request to get them fixed to avoid any potential loan application rejections.

8. Co-applicant:

Maintaining a good credit repayment record is crucial for loan applicants. Even if your repayment record is clean, your loan application may get rejected if your co-applicant has a reported credit card issue.

Besides, the relationship with the co-applicant also matters when determining your loan application. Most banks generally do not allow sisters, a brother and a sister, or friends to apply for a loan as co-applicants.

9. You are/were a loan guarantor for someone who defaulted the loan:

You have to be careful when being a loan guarantor for someone. You should ensure that the person you are guaranteeing a loan for has the ability to repay it on time. Take note that if the borrower defaults on the loan due to any reason, you, as a guarantor, will be responsible on his/her behalf. If you are unable to repay it, it will negatively impact your credit score and ultimately result in your loan application rejection.

10. Frequent loan applications:

You should be mindful of how frequently you apply for loans. Applying for loans without a valid reason is not recommended, as every time your loan application is rejected, it is recorded in your CIBIL record. Therefore, it is advisable to consider the advantages and disadvantages before applying for a loan with multiple banks simultaneously. It is better to wait until you receive an offer from one bank before applying to another. This way, if necessary, you can rectify any mistakes or update your credit record before approaching another lender.

11. Not paying the taxes:

If someone has been inconsistent in paying their income tax returns on time in recent years, their loan application could be rejected.

12. Your age:

When a loan applicant is close to reaching retirement age, their loan application may be rejected by lenders. This is because the lenders may have concerns about the applicant's ability to repay the loan as their income may decrease or stop altogether after retirement.

To conclude:

As you might have understood, there are various factors that affect the approval or rejection of loan applications. These include credit score, income stability, residential stability, job stability, tax payment history, and more. You should keep these factors in mind and ensure that all necessary documents are provided correctly while applying for a loan. A rejected loan application can negatively impact an individual's credit score, making it difficult for them to get a loan in the future. Therefore, it is advisable to take steps to maintain a good credit history and approach lenders with a well-planned loan application to increase the chances of approval.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.