A credit score is one of the most important factors in determining loan approval by banks and financial institutions. If you have a good credit score, you can get a higher amount and flexible repayment period. However, it is not necessary that your education loan or any other loan will be approved even if you have a good credit score. Banks may reject your loan based on the credit report that includes your repayment behaviour, ongoing and closed loans, overall credit score, personal loan credit score etc.
Let’s understand the factors due to which your loan may get rejected by banks and financial institutions even if your credit score is good –
Table of contents
High Debt-to-Income Ratio (DTI)
Debt-to-income ratio is the percentage of your monthly gross income that you are paying against the existing debts. When you apply for a secured education loan or any other type of loan, the lenders don’t just focus on your credit score. They scrutinise your ability to manage additional debt. If your existing debt is too high compared to your income, the loan will be rejected by the bank. The debt-to-income ratio shall not be above 50%.
Also Read: Facing difficulties in managing your education loan repayment? Check this blog and understand all about Education Loan Restructure
Insufficient Monthly Income
The bank or lending institution will approve the loan and determine the loan amount based on your income. Even if you know about the importance of maintaining a high credit score and you have done the same, lenders need assurance that your income can comfortably cover the loan amount. If your earnings fall short, rejection may follow. It is better to check all the eligibility criteria before applying for the loan.
Inconsistent Employment History
The bank will also check your employment history i.e. for how long you working with your current organisation or employer. Frequent job changes or an inconsistent employment history could make lenders wary of your ability to meet financial obligations. A work history of more than 6 months with the current organisation is usually essential for getting the loan approved.
Discrepancies in Credit Report
Always check the information on your credit report properly. Sometimes, the report shows inactive loans and outstanding as pending. This can be a major reason for loan rejection as the approval is totally based upon the information available in the report. information on your credit report, such as outdated late payments or accounts that you’ve already settled, can impact your loan application. If you notice any irregularity or discrepancy in your credit report, then get it corrected immediately by notifying the credit enquiry company.
Also Read: Interest Rate increased on existing education loan? Check this blog and know all about Education Loan Refinancing
Too much Credit Inquiries or New Credit Accounts
While actively managing your credit is commendable, a flurry of recent credit inquiries or opening numerous accounts in a short span might make lenders question your financial stability. For example, you applied for a credit card in the month of January. The card issuing company made an enquiry which will be reflected in your credit report. After 2 months, you took another credit card and a personal loan. In the very next month, you applied for an education loan and while checking your credit report the bank found more than three enquiries in the last 3 months. Based on this, the bank can reject your application.
High Credit Utilisation
Even with an excellent credit score, using a large portion of your available credit might raise concerns about your financial health. For example, your credit card limit is INR 1 lakh and you have consumed 90% of the available credit limit. If this is your credit utilisation every month, then the bank may reject the loan due to excessive utilisation of credit.
FAQs on Loan Rejection with Good Credit Score
There are multiple reasons due to which a loan application gets rejected even if you have a good credit score. Some of the common reasons are employment history, multiple credit enquiries in a short period, credit utilisation, high debt-to-income ratio etc.
Always make timely repayments, check your credit report and get the error rectified if any, choose longer loan repayment terms, and try to set credit utilisation to 30% or less. With these factors, your credit score will gradually improve.
Contact the credit enquiry company and notify them about the errors. Provide supporting documents so that it can be rectified immediately.
It totally depends on the bank or financial institution and their terms and conditions. Usually, the banks may reject your application if your employment history is less than 3 months.
Every bank and financial institution has its own terms and conditions for approving the loan. Some NBFCs can provide you with a personal loan if your monthly income is INR 25000 or more. Also, it depends upon the city where you are working.
Receiving a rejection can be disheartening, but viewing it as an opportunity for improvement is very important. Request an explanation from the lender to understand the specific reasons behind the rejection. Additionally, obtain a free copy of your credit report to check for inaccuracies and discrepancies. This will help you to understand the reasons and you can work on those to improve your credit report.
To know more about the loan application process, the best bank accounts for students, forex and banking experience for global students, or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
