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Loans: Tips to get your loan application cleared

Avoid applying for too many loans at once because it’ll only harm your score and lead to more rejections

Loan APPLICATION rejection can happen for multiple reasons. Inconsistency and delay in payments of your debts is the typical reason. It can also happen if you’re ignorant about how your adverse credit history is leading to loan rejections. If you’ve been rejected recently, it’s important to assess the reasons and work on them. It’s also important to keep track of what your loan applications and their rejection are doing to your credit score. Multiple rejections can damage your credit score further, and it could take you months or years to recover from there. Here are some things you can do if your loan application has been rejected recently.

Assess reason for rejection
Find out why you were rejected. Typically, a lender will provide the reason to help the borrower course-correct and become eligible for the loan. For example, providing a guarantor might help in getting the loan. Rejections can be caused by a wide variety of reasons such as poor credit score (under 700), insufficient income, too many pending loans, non-payment or late payment of previous loans, problematic employment history, legal issues in movable and immovable property to be mortgaged to the lender, etc. The rejection can also happen due to errors in your credit report—for example, your PAN is erroneously linked to someone else’s loan default. Knowing the reason is an important step in improving your credit health.

Work on reason for rejection
Timely payment of your EMIs and other debts is essential for good credit health, which leads to fewer loan rejections. A good credit score—anything above 750—leads to the best loan offers. If a low credit score led to loan rejection, work on improving it. Timely and full repayment of your dues will start nudging up your score again. Keep your credit utilisation low and don’t close your existing credit cards or apply for new ones to avoid a negative impact on your score. Your lenders can access details of your pending loans and demand your bank statements to assess the percentage of your income being used for EMIs. They prefer you spend no more than 55-60 % of your disposable income on loans. If your income is already leveraged to that level, you may be unable to service new loans, and therefore you may face rejection. Higher disposable income is preferable. Also, keep your name, address, signature, PAN, Aadhaar, and other documents for loan in place so that the rejection isn’t for a non-financial reason such as a name or an address mismatch.

Don’t keep applying
Every time you apply for a loan or credit card, the lender initiates a ‘hard’ check into your credit history. Each hard check marginally lowers your credit score. Therefore, multiple loan applications in a short span of time are going to hurt your credit score severely. If you’ve already been rejected once, chances are you’ll be rejected again. So avoid applying for too many loans at once because it’ll only harm your score and lead to more rejection. Successive hard checks also show you to be credit hungry, which is a red flag for the lender.

Track credit score every month
To know what is happening to your credit history and how your score is reacting to your payments, delays or loan defaults, it is a must to track your credit score every month. You can get a free monthly credit report from Experian or CIBIL. The report summarises your credit activity, repayment track record, and loan status. It is a snapshot of your financial health. Knowing where your credit score is can help you make decisions to improve it. Monthly tracking also helps spot discrepancies and errors which can also harm your score. You can flag these errors to the relevant credit bureau.

Apply again as score improves
Based on the damage caused by loan rejections, it may take time to improve your credit score. It typically takes four to 12 months. However, if you already have a good score above 750, it takes less time to further improve it. Your consistency in payments of debts and good credit behaviour helps you improve a damaged score.

The writer is CEO, BankBazaar.com

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