We generally believe that getting a bank loan is easy in today’s consumers driven world, but at times times a bank loan can be refused. This applies to any type of loan you might apply for, including home and auto loans, credit cards, personal loans, and business loans. Whenever there is a disconnect between what you thought was possible and what your lender agrees to, it’s worth having a look and asked why.
That’s the first thing to do if you have been refused for a bank loan, because the reasons can have its implications too. Sometimes it can be a minor issue like address verification being inconclusive, or at times a more serious issue like a bad credit rating.
If the bank feels that your income is lesser than the amount you have applied for, they might try to hold back from passing the loan. The lenders look into the capability and capacity of the borrower in repaying the loan, that is the reason banks want detailed documentation on your sources of income and bank account details. With some loans, such as home loans, lenders are required by law to calculate your ability to repay.
Bad or below average credit rating is most often the reason for a bank to refuse a loan. For example, a CIBIL score is anywhere between a score of 300-900 and anything around 750 for an individual is considered good. CIBIL says 79% of loans are approved for individuals with a score greater than 750. Similarly, for companies there is the Companies Credit Report (CCR) that ranks the companies on a scale of 1 to 10, with 1 being the highest and the best score a company can get. Only the companies having a credit exposure of Rs. 10 lakh to Rs. 10 crore are ranked and according to CIBIL companies ranking 4 and above tend to get a loan. If your bank loan has been rejected and credit rating is the culprit, get a detailed report from credit rating agencies.
You can consider making a bigger down payment, thus lessening the amount of money for loan especially if you are applying for a home or car loan. Once your total repayment liability comes down and the EMIs become more manageable the bank might find it favorable.
When your existing debt is too high, the bank may not sanction you a new loan. Banks usually look for a debt to income (DTI) ratio of around 35-37% and above 40% is generally considered risky to them. All your loan history be it personal loan, car loan, home loan and even credit card outstanding is considered in when calculating for your DTI. If your loan has been rejected because your DTI is too high, you may consider paying off or clearing some of your outstanding loan amounts before you seeking for a fresh loan.
At times providing a collateral which can be an asset like a house or land or shop, provides a comfort to the bank and reduces their risk outlook. The collateral thus stands as a guarantee for the bank, so in case of failure of payment, the bank can recover their money by taking over the collateral.
If your loan is rejected by the bank, step back and find the reason for it. By applying incessantly, you will be doing more harm to your ratings. If you are not getting a loan approval immediately, then put a halt, check and recheck your financial situation, set them straight then apply.