Lending secrets are out: What stops you from getting a loan?

“Your loan request has been declined.”

“You loan request has been rejected. Sorry, we regret the inconvenience caused.”

“We are extremely sorry but we won’t be able to extend you credit this time.”

“We are saddened to tell you that we have not been able to approve your loan application.”

Doesn’t feel good to be on the receiving end of any of these lines, right? Getting a loan approved is no easy feat. If we are being HONEST, it’s easier to get your loan application rejected than approved in today’s time. Popular opinion says that getting your loan approved depends mainly on the credit score. However, sometimes your loan application could get rejected even if you have a fantastic credit score and you would be left wondering, why? It’s almost like, banks don’t think twice before rejecting loan applications. Not fair, right?

As a Fintech brand, we feel the same! So, in order to simplify the whole loan approval process for you, we have decided to spill some beans of the lending industry – the 7 undisclosed reasons for loan rejection other than credit score (yep, yep don’t be surprised!) The secrets are:

1. Defaulting on secured loan

Wondering what secured loans are? Secured loans are loans in which the borrower pledges an asset (car or house etc.) as collateral in order to get the money. If you fail to pay your loan on time, the lender will take a hold of your collateral. Hence, a collateral serves as a powerful motivator to pay your loan installments in a timely manner. Trust us, when it comes to the lending industry, this one is simply non-negotiable.

No, we are not saying that you can default on an unsecured loan and get away with it but what we are saying is that in case you default on a secured loan, there is no way your loan application is going to get approved for a number of coming years. Be it a home loan or a car loan, in case you miss even one EMI, you will be in a lot of trouble. Other than losing your house/car to the bank, you will also be in a way blacklisted and will find it very difficult to get a loan in future. So, NEVER default on a secured loan.

Sqrrl’s recommendation: The special tip for this point would be to absolutely avoid getting into this mess. Other than that, the one thing that could help you is taking smaller consumer durable loans of up to 1 lakh. This will slowly help in building credibility and credit history again. 

2. Past debt settlements

The loan settlements that you have made in the past might get in the way of your current loan approval. If you don’t know what a loan settlement is, then let’s explain it to you in short. It means that if you borrow an amount you are not able to pay due to some financial crisis, then if the creditor agrees then you (debtor) can pay a lump sum amount, lesser than the whole debt amount and be free of the debt for once and for all. This is termed as “loan settlement”. The drawback is that in this case, the bank will file for “settlement” in all the credit bureaus instead of saying “closed transaction”. This means that you will be seen as a black sheep for at least 7 years in CIBIL’s records.

Nobody wants to lend money to someone who already has a reckless past payment record. The fact that the bank chose to settle the loan in the middle of the repay term because you couldn’t pay your installments on time speaks volumes to the lenders. Hence, past debt settlements become another major factor in loan rejection.

Sqrrl’s recommendation: Try to avoid settling a loan by all means. Pay off the loan by asking friends/family for money if possible. Also, you can ask the bank to extend your repayment period so that you get more time to pay off the loan.

3. Multiple loan/credit card inquiries over a short period

This is another reason for loan rejection. If you make a number of loan inquiries over a short period of time, the borrower thinks that you are a credit greedy person who is not getting loan from any bank/NBFC, which is why you have been applying anywhere/everywhere. They start doubting your paying back potential when they see how difficult your financial situation is. The situation could get real sticky as every time you have applied for a loan somewhere (even to get rejected), the hard inquiry has already been made by the bank/NBFC in order to get your credit score (read more here).

This means that not only will your credit score drop but it becomes a major red flag for the lenders. The number of applications and rejections make the “current” lender feel like there is something fishy in your case and that’s why every previous lender rejected your loan application over such a short period. Again the result – Loan rejection!

Sqrrl’s recommendation: Try to keep the number of inquiries below 10 every year.

4. Not being wise about where to apply for loan

If you are not wise about where you are applying for a loan, you might just get in trouble. Sometimes when you are applying for a loan just check once, the kind of bank you are applying in. Imagine a scenario, where you apply for a loan at multiple places and one of them approves. You get your loan but let’s say, after 2 months, you need more money. What do you do then? First thing you can do is, try for a top-up. Most banks give top-ups to reliable customers. If you are rejected a top-up then the next and the most obvious thing you will do is apply for a loan somewhere else.

Now, the banks will question the viability of your request. They will think why is it that you are in need of so much money again, that too after such a short period. Big red sign for the banks. So again, one of the most common reasons for loan rejection.

Sqrrl’s recommendation: in this case, before you ruin anything, try to apply in some microfinances or NBFCs for a loan. The word will reach them too of course, but you have a higher chance of getting loan there.

5. Unstable employment past

Banks want to give loans to people with a stable employment history. If you have a history of quitting jobs one after another, getting fired, or having to endure long periods of unemployment, banks will shun away from giving you a loan. The reason being that with an unsteady job, chances are high that you won’t be able to pay your loan installments on time. 

Nobody wants to lend money to someone who seems less than capable of paying it back. Hence, an unstable employment history will adversely affect the chances of approval of your personal loan application.

Sqrrl’s recommendation: Ensure that you don’t change jobs too often. Whenever you switch, have a good enough reason to do so. A Stable employment history shows that you are a reliable candidate.

6. Low annual income

Banks want to be sure of the paying back potential of the borrower. In case, the borrower has a low annual income, chances are extremely high that his/her loan application will get rejected. If you can barely meet your own expenditure, how will you be able to pay the loan installments?

Banks do a thorough analysis of your personal profile, your living conditions, and your income before they approve a loan. If you seem shady or unreliable in any way, a bank will not hesitate in rejecting your loan application. The amount of loan that will get approved will always be dependent on your income; it will be proportionate to your income and never more.

Sqrrl’s recommendation: Apply for an amount that is in proportion your pay back potential. If you apply for a much higher loan, you will instantly lose a shot at getting your loan approved.

7. Inaccurate details in loan applications

This one is a no-brainer. If you submit the loan documents with wrong information, your loan application will get instantly rejected and the bank will lose faith in your capability. Doubts will arise in the minds of the lenders that you filled the wrong information deliberately. Remember that all information is verified multiple times before your loan gets approved so chances that your fraud will get caught are quite high.

Misguiding the bank or any other lending institution is highly inadvisable. If the wrong information is submitted by chance, you can try to apply again but your loan application approval chances will still be low.

Sqrrl’s recommendation: Avoid any vagueness and inconsistency in your loan application. Be truthful about your personal information. Check everything twice before submitting your application.

8. Multiple existing loans

Whenever you apply for a loan in any bank or NBFC, remember that they can access your financial profile across all platforms. In fact there is a section of credit report that highlights all loan queries by the prospective borrower. In case you already have multiple pending loans, the bank might not be willing to give you another loan.

It makes it easy for your bank application to be rejected if you haven’t been paying your loan balances in a timely manner or you’re using too much of your available credit.

Sqrrl’s recommendation: Make sure that you avail loans only when necessary and ensure timely payment of installments. 

9. Occupation of the borrower

Your occupation does influence the way the bank looks at you and your financial background. In some cases your loan application might be rejected if the bank thinks that your employer is not that reliable. 

Banks and NBFCs consider occupation and business continuity an important criterion to judge your repayment capacity.

Sqrrl’s recommendation: Although not much can be done about it, it always helps to work in a reputed organization where job stability is promised.

10. Loan purpose mismatch

Although personal loans provide a lot of flexibility as to how you can use the funds, some lenders may not allow you to use them for certain activities. It is not uncommon for lenders to reject personal loans for reasons like secondary education (i.e., college tuition), for making investments such as in stocks, or anything illegal or partially illegal (i.e., gambling).

Sqrrl’s recommendation: Do make sure that your loan application matches your loan purpose. For example, if you need funds for high education, looking into a student loan may be more appropriate.

This concludes the list of the top reasons why you can face loan rejection from banks/NBFCs. Remember all these points, and make sure all your personal documents are in place before you apply (should be the first step) so that you leave no scope for rejection. Now, you are fully prepared to apply for a loan. So, go ahead and apply, hopefully your application won’t get rejected this time around 😉