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Why loan applications get rejected

Updated on May 1, 2016

To overcome short term financial crises or to buy something expensive we try to get loan from financial institutions. Sometimes we get it easily while sometimes it gets rejected and we keep on hopping from one bank to another bank to get it approved without knowing the actual reason behind such rejection. While consulting bank officials for the reason behind rejection of loan application they will generally guide you through the below mentioned points. So get through the points and get your loan approved at once.

Rejection of loan application before

If you have ever applied for the loan and it has been rejected on some grounds it will effect your current loan application. So before applying see to it that you have positioned yourself to answer all the events which led to rejection of previous loan application.
For example if your previous loan application was rejected because of non maintenance of proper books of accounts see to it that this time you present all the relevant books of accounts with the loan application.

Too many previous loans and too little income

Loans applications are sanctioned based on the applicants ability to pay back the loan in instalments. Applicants ability to pay back the loan instalment is calculated by taking the current monthly income of the applicant and deducting from it the general household expenses on an estimate and any other loan instalments currently payable by the applicant. The resultant amount is generally multiplied by a factor to get the total loan amount that can be sanctioned.
For example say Mr. A's current monthly income is $1000 and his total of monthly expenses and instalments to be paid comes to $850. In this case the maximum loan amount that can be sanctioned is ($ 1000 - $ 850) multiplied by the factor (say 60) comes to $ 9000. In the same case if his total of monthly expenses and loan instalments to be paid comes to $ 1050 then his loan application will be rejected as he is already facing deficit of $50 and in this case if a loan is sanctioned to him, he may not be able to pay back the instalments on time.

Job must be 3 years older

While scrutinizing the loan applications the financial institutions gives priority to the applications where the applicant has a sound financial background. This also means applicant who had a well settled job will get loan easily as compared to the applicant who had just started his career. So the banks or financial institutions see that you must have been working for atleast 3 years prior to loan period. This ensures that the applicant is serious about his job and will not leave once the loan application is passed, even in the case of job switching after the loan is approved he will be capable of paying instalments in the event of break in between job switching. This technique also helps to prevent temporary workforce from making a loan application as there is no job security then how can the bank be sure about his regular instalments being paid on time.

Co applicant has a poor credit score

If you have applied for a loan jointly with another person the bank will check credit history of both the applicant before finalizing the loan. So if your co applicant have a poor credit record then it will have an effect on your loan application status. A poor credit score means that some time in history there is a default committed in respect of repayment of loan amount by the applicant. The score gives an estimate about the number of times the default has been committed, the loan type and the amount involved. So if you are planning to apply for a loan jointly then firstly be assured about the good credit rating of the co-applicant otherwise if he is having a poor credit rating there are chances that your loan application will be rejected.

Poor track record of credit card or loan repayments

If you have ever defaulted in making your credit card payments or payment of loan instalments then you may face difficulties in getting your loan amount sanctioned. With every default you commit your credit score gets low and lower credit score will ultimately effect your loan approval process. The financial institution wants to get assured that the loan amount they are sanctioning will not become a non performing asset for the bank and for this assurance they rely on the credit score of the person. So it's very important that you have a good credit score to get loan sanctioned easily.

Essential requirements have not been complied with

While submitting a loan application see to it that all requirements mentioned in the application have been strictly complied with. For example an application needed a guarantor details who takes a guarantee that you will make timely payments and comply with any instruction given by bank has not been furnished.
The loan application with a missing information related to one or more points mentioned below can be rejected.
1. Name, address and phone number of the applicant.
2. Income details of last 3 years
3. Tax details
4. Guarantor or Introducer details
5. Bank account details
6. Other loans details
7. Credit score


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