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Unable to get loan approvals? This may be the reason why!

Getting approved for a loan when you need one may not be the smoothest experience for all. Most of the time, when you are notified of loan applications getting rejected, the communication is vague and you are left in the dark regarding the exact reason for the rejection. It helps in such cases to have your questions answered on why you are not being sanctioned for a loan. This, in turn, contributes to bettering your financial habits so the same won’t happen in the future. We’re here to take you through some of the common reasons for loans being denied, and what you can do to improve your application.

Key reasons for rejection

Poor credit score 

While this reason comes as a surprise for no one, it remains among the most usual reasons for loan rejections. The borrower’s credit score is the first thing most lenders evaluate because it is also a window into how you manage your personal finance. You must understand that everything from the length of your credit history, your credit utilization pie chart, re-payment history, are reflected in your credit score. If you haven’t fared well on this front, your loan eligibility becomes significantly low.

Turning your credit report around

If you have embarked on a mission to fix your credit history, making sense of, tracking and enhancing your underlying data should be among your priorities. The first thing to ensure is that your credit report is updated to reflect your recent practices. You must also ascertain if there are any lags in your report, typically around closed loans that are not reflecting on your report, among others. This may be contributing to lowering your credit score. The third thing to do is obviously taking control of your debts, by way of paying off dues on time, removing dated debts, and reversing delinquent accounts for an overarchingly healthy credit report.

Debt-to-income ratio on the higher side

This may be brand new information for a lot of you but one of the major reasons why lenders end up rejecting borrowers is their mismatched debt-to-income ratio (DTI). To put it in layperson language, a debt-to-income ratio is a comparison of one’s debt obligations to the person’s income every month. For your understanding, here’s an example: if you earn Rs 5,000 per month and your consolidated debt payments amount to Rs 2,000, your DTI is 40%. 

It does not take much to change a few things around to enhance your ration. All you need to do is exercise unbridled financial discipline in making timely repayments, increasing income, among others. 

Inconsistencies in employability 

Job security is crucial for lenders at the time of your credit profile evaluation. Simply because it affects to a large extent, the borrowers capability to make timely payments. It is not enough to have job stability over the short term only. They evaluate the same on the basis of the long termism of your job security, by assessing your typical run with every job, among others. Recent job changes or declaring that you are looking at a possible job change in the near future may shake the lender’s faith in your repayment capacity.  This is because traditional banking institutions often consider the scenario where your new job does not work out for you and you are unable to afford the monthly repayments on your loan. 

Qualifying income isn’t enough

For your loan application to go through your income should be regular and sufficient to denote that you can indeed afford the monthly payments on the loan you are looking to take out. You must also understand that not all your income will count during evaluation. Unreported and undocumented cash incomes, commissions, among others will not enhance your application in most cases. 

You must refrain from making sizeable transfers or deposits once the loan processing is underway. Keep Limit transactions to your regular, accounted for paychecks. Not being able to properly document your income, will enhance the likelihood of loan rejections.

Your application has errors

Be extremely mindful when filling out your loan application as disparities in your personal information is one of the sureshot reasons for meeting with on-spot loan rejections. This is simply because from the mix of all the loan applications lenders are expected to review, one that is incomplete and erroneous will simply not be worth their time. Inadequate information on your income, debt obligations, prior settlements or bankruptcies among others may affect effective underwriting. 

It is important that you try and keep no fields empty when filling out your application. 

Quick tips to overcome the concern of loan rejections 

  • Keep all relevant documents to enhance your credit profile handy as missing documents can mean loan rejections 
  • Be able to show savings and cash reserves to increase lender confidence 
  • Before starting a big-ticket loan, consolidate your short-term and small-ticket loans to improve credit utilization and DTI
  • Make it a point to regularly review your credit report to keep it up to date and address negative aspects
  • Show your income in full and keeping in consideration all key accounts

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