CIBIL Score = 750+; Loan application = Rejected; Here’s why!
CIBIL scores basically tell banks whether or not you’re likely to default on loan payments, based on your history with other banks in terms of loans, credit cards, EMI payments, etc. A score above 700 is considered acceptable, and anything above 750 has a safe chance of working in your favour (considering a range of 300-900).
You plan and meticulously detail and define the amount you need to take out a loan for whatever purpose. You decide that all the finances you need are a simple loan approval away and you confidently march your loan application and highly respectable CIBIL score to the bank and submit them for consideration.
Most banks take around 72 hours to approve loan requests and in this time you reflect on how you’ve done everything required to keep your CIBIL score high enough – working hard to make your payments on time, paying the amount promised and play it straight with your bank – never asking for extensions, reductions or settlements. You use your credit card in moderation and make your payments before they’re due. All this to get your CIBIL score up to a point that will ease the loan application process and ensure that loans are granted. Three days later, the bank performs its due diligence and informs you that your loan application has been rejected!
So what went wrong?
CIBIL scores, while they play a huge part in the process, are not the only thing that banks look at before sanctioning your loan. Banks and financial institutions also consider the following:
Comments in CIBIL reports – In addition to a numerical score, CIBIL reports also contain remarks and comments by lenders. Banks sometimes offer you the option to settle your loan for a slightly smaller amount than all of your EMIs combined, or offer interest rate reductions, etc. to help you clear your debt. If you settle your loan in any way apart from the terms on which you took the loan, there will be a remark about it in your CIBIL report and this will work against you. If there is any mention of loans being “written off” or “settled”, or amounts being paid after the due date (“DPD” = Days Past Due), banks take these as warning signs and will reject your loan.
Standing guarantor on a defaulted loan – A guarantor is considered to be as responsible for loan repayment (even if not in a purely literal capacity) as the borrower. If you have stood guarantor to a loan that has been defaulted, this will affect your CIBIL score and report in a negative way.
Defaulter details matching – Banks and financial institutions maintain lists that contain the name, age, address, current employment, and other details of individuals who have defaulted on their payments. If the details you have submitted are (even mistakenly) matched with a defaulter, you will be denied a loan before the bank even checks your CIBIL rating. There have been instances where those who have moved into houses previously occupied by defaulters and submitted that address have been matched with the “address” records of defaulters, suffocating their chances of securing a loan.
If you are overleveraged – You can only assign a certain amount of your declared income to clearing debts. If you earn Rs.50,000 per month, and have three other loans you’re clearing by paying Rs. 10,000 per month, each, you’re left with Rs. 20,000 for survival and personal expenditure. Banks will not approve another loan and will deem you overleveraged. Your DTI (debt-to-income) ratio will be unfavourable and you will not be able to allocate more of your income to clearing off your new loan.
Inadequate tax-paying history – Banks generally prefer applications from those who have been actively filing income tax for at least two years prior to the application. It is easier to judge the creditworthiness of such individuals as there is an existing record apart from CIBIL that can nudge them in the right direction.
Over-borrowing – If you have taken out too many loans in the previous year, regardless of whether you were able to honour them or not, banks will not approve your loan as they deem such individuals as credit hungry. Even though your record is clean, you will be considered a risky candidate who can default at any time.
Ratio of secured loans to unsecured loans – Secured loans are those taken against securities like assets or with a guarantor (home loans, automobile loans, etc.) and unsecured loans are taken without any security (personal loans, credit cards, etc.). A favourable ratio would be one which has more secured loans than unsecured ones.
Anything else I should keep in mind to be viewed favourably by lenders?
As it’s clear by now, sometimes loan applications can get rejected through no fault of your own, it is important to be diligent and actively involved in managing your finances. It’s also recommended that you check your CIBIL report once every six months to ensure that everything is as you left it.
FAQs on Reasons for Loan rejection
Are there any other rejections that happen by association?
Yes, if you work in a location where a large number of your co-workers have defaulted on loan payments in the past and/or have bad credit scores, the lender will reject your application as you are associated with these people. The lender will assume that since so many of them defaulted on their debts, the company may not be stable in their monthly salary disbursements, or there may be some issue with the company as all the defaulters have only their employment details in common with each other.