Reasons for rejection of a loan application by a bank with a high credit score: why banks reject a mortgage, car or personal loan application even when the credit score is good
By Rohit Garg
Credit scores are booming in the market, from highly reliable credit bureaus to floating offers from payment platforms. It is important to understand the purpose of these different scores and their impact on your credibility as a borrower. Many factors are considered by other evaluators of your scores, based on your information. Then there are specific criteria for calculating scores if you have applied for a loan.
Risk managers are responsible for securing a bank’s bets to protect them from bad debts. In doing so, they may consider factors that are not used in the overall assessment. This may result in your application being rejected even if you are only just outside the threshold. Let’s see how to secure loan approval by understanding the various parameters involved.
Employment status and monthly income
Having a steady job and earning a viable income to cover your loan repayment terms are crucial aspects of being eligible for a loan. The loan application includes a myriad of questions regarding your career and finances, all of which are used to statistically calculate your credit score. The threshold may seem fair, but the riskiest prospects are automatically rejected. This process may be discretionary in many cases.
Rating agencies do not consider traditional information from a loan applicant, unlike banks. It’s hard to let go of your tainted past, especially if you’ve already gone bankrupt. Being on the bad books of financial institutions can be very detrimental to your future reliability. Always being on track with your debt commitments and making scheduled payments is key to being classified as a performing asset for banks.
Frequent borrowing problem
If you inquire with too many banks for a loan at the same time and even one of the applications is rejected for some reason, it could damage your credibility. It’s always best to stick with your bank as you mutually benefit from each other, and the relationship manager ensures your application is approved.
On the other hand, if you have an existing loan from a financial institution and you apply for a new loan, your chances of getting it decrease due to over-indebtedness. Credit card loans are also red flags when you already have a running loan account.
There can be no problem with your credibility. However, if the bank’s portfolio exceeded the loan penalty limit in a given period when you applied for a loan, the bank could rationalize your score to de facto reject it. Banks also compare details of other financial institutions for defaulter history.
It can be considered as a qualified report if you have a good score with comments under certain sections. You might be in the habit of repaying your debt commitments (DPDs) late, or you might be the guarantor of a delinquent loan. Even defaulting on tax payments affects your credit score. All of this reflects negatively on your credibility.
If most of your assets are pledged or mortgaged, this indicates your indebtedness. If a bank can’t get hold of your property for its safety, it’s difficult to sanction your request, even if everything else is favourable. Your secured/unsecured loan ratio must also be favorable to secure you a loan. Also, the applicant should be aware of the EMI to income ratio, which is crucial in evaluating the loan application.
Banks have strict guidelines regarding loan disbursements with bad bank policies and laws. It would help if you were diligent in managing your finances. Some banks have also started to integrate credit scores into credit card bills. You should never take a devalued score lightly and thoroughly educate yourself on the reasons for the same. If it is an anomaly, it must be reported immediately to the bank concerned. In case of ignorance on your part, you must remedy it as soon as possible.
General scores should be used as a guide to guide you through a custom score. A credit score of over 750 is considered highly desirable. Since sheet music is freely available to everyone with a bit of your details, you should definitely consider how this changes.
(The author is CEO and co-founder of SmartCoin.)