Most people in India believe that if their credit score is 750 or more then getting a loan is certain. But the truth is that just having a good score does not ensure loan approval. Many times banks and NBFCs reject even applicants with good scores. Why does this happen, let us understand in simple language.
Credit score tells how responsibly you have repaid your debt in the past. But banks do not take decisions on this basis alone. They examine your entire financial condition. How much is your income, whether it is regular or not, how stable is your job. All these things play an important role in loan approval. If your income fluctuates or you change jobs frequently, the bank considers the risk higher.
Existing debt can also become a hindrance
Suppose your score is good, but EMIs for home loan, car loan or many credit cards are already going on. In such a situation, the bank sees what portion of your monthly income is already going towards repaying the loan. If the EMI burden is high then giving a new loan can be risky for the bank. This is called debt-to-income ratio.
Repeatedly applying for loan is harmful
Many people apply for loans in several banks simultaneously. Every time you apply, a hard inquiry is recorded on your credit report. Due to excessive enquiry, the bank feels that you need money urgently or your financial condition is weak. This increases the chances of the application being rejected.
Bank’s internal policies are also important
Every bank has its own risk policy. Sometimes banks exercise caution in applications related to a particular sector, job profile or area. It may also happen that the bank wants to keep its loan portfolio balanced and hence stops some applications, even if the score is good.
Document and information errors
Incorrect or incomplete information, not providing solid proof of income, or past default record can also be a reason for loan rejection. Even if you repay the dues later, banks see your entire history. Maintain a good credit score, but at the same time keep the income stable, keep the EMI burden balanced and do not apply in many places unnecessarily. Before taking a loan, make your entire financial picture strong, only then the chances of approval increase.
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