Top 12 Reasons For Loan Rejection With Good CIBIL Score

When you apply for a loan, the first thing a lender does is check your credit score to check your gauge your creditworthiness. Lenders go through your CIBIL report more scrupulously in unsecured loans as there is no collateral and hence the risk associated is bigger for lenders. It is also a reference point for gathering information about your past credit activity, repayment history, and the status of your credit accounts, among other things. Thus, the importance of having a high credit score is immense for loan approval. If for some reason, you have an unsatisfactory credit score, you should take measures to improve your credit score. Although a good credit score doesn’t guarantee loan approval, a low score is the primary reason for loan rejection. Knowing how to read your CIBIL report and how a credit score calculation is done can help you improve your credit score for future loans.

Can a Loan Get Rejected with a Good Credit Score?

As mentioned earlier, a good credit score implies good creditworthiness of the borrower. A loan applicant who has a favourable credit score means that he has displayed responsible credit behavior in the past. However, an ideal credit score doesn’t explicitly mean that your loan application would be approved.

Let us understand the reason why.

• Multiple Loans: Although you may have displayed good credit behavior in the past, too many loans may project you as someone with credit dependence. This makes you a risky applicant as lenders might assume you might not be able to repay multiple loans on time.

• Guarantor or Co-Applicant on a Bad Loan: If you are a guarantor or co-applicant on a loan in which the primary applicant has defaulted, it reflects badly on your credit rating too.

• Loan Settlement: When you ‘settle’ a loan, you are essentially paying the lender an amount lesser than the due amount to close the loan account. The lender allows this option only if it is unsure that you will be able to service the loan in the future. Loan settlement is mentioned in the comments section of your CIBIL report.

• Unsteady Income: An ideal borrower for a lender displays that he has a steady income and is capable of repaying the loan. But if you are someone who switches jobs frequently or without a stable income, you may come across as a risky applicant and your loan could get rejected.

• Irregular tax paying record: Apart from your CIBIL score, your ITR is also reviewed and considered by lenders. Lenders favor loan applicants who have regularly filed their income tax in recent past years.

• Poor Credit Mix: When you have availed of several loans and if the number of high-risk unsecured loans is more than secured loans, it is considered a poor credit mix. So, even when you have a good credit score, your loan application may get rejected.

• Recently Rejected Loan Application: If your loan application has been rejected for any reason in the recent past, it could have a bearing on your new loan application.

• Poor Credit Utilization Pattern: You could have a good score but if you regularly max out your credit cards or stretch out your credit limit, the lender may view you as a risky borrower.

• Multiple Hard Inquiries: When a lender pulls your credit report to check your credit history, it is considered a hard inquiry. Multiple hard inquiries indicate that you have applied for loans multiple times, which might result in loan application rejection.

• Incomplete Financial Documentation: If you have not provided the requisite financial documents and details, your loan may get rejected.

• Low Credit Score of your Co-Applicant. In the case of a joint loan, the credit score of your co-applicant will be taken into consideration. So, if he/she has a poor credit score, your loan application may get negatively impacted.

• Age of the Applicant: Lenders are wary of lending to applicants whose age is closer to the retirement age. Lenders view such applicants as being potentially incapable of servicing the loan for the entire tenure.

How to Increase your Credit Score?

Since a low credit score is one of the primary reasons for loan rejection, it is advisable to take steps to improve your credit score.

Some of the ways you can increase your credit score are:

• Make timely payments: This will not only help in improving your credit score calculation but also helps in avoiding high interest on late or missed payments.

• Clear Pending Dues: It is advisable to clear past dues before applying for a new loan. You can contact your lender for debt repayment restructuring options.

• Check your CIBIL Report: There are many websites where you can download your free credit report. If there are any errors in the CIBIL report that have decreased your score, report it to CIBIL immediately.

• Practice good credit habits: Always make a budget for your loan payments. It is easier to tweak your spending habits when you know how much loan payment you have to make each month.