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Does Loan Rejection affect CIBIL Score

When you apply for a loan from a bank, the financial institution will evaluate your capability to pay back the borrowed amount through different factors. Such factors include your income, age, salary and credit information report. Your credit information report comprises of your credit history and CIBIL score, and the CIBIL score is an ultimate deciding factor when it comes to loan disbursement. Therefore, it is ideal to know your CIBIL score before applying for a loan. A regular check-up of your CIBIL credit score will allow you to fix any discrepancy in your report before applying for a loan.

Impact of Loan Rejection on your CIBIL Score

As mentioned before, the first thing any bank does is check your CIBIL credit report during the loan application. When a bank or credit institution makes an inquiry, it is known as a hard inquiry. A hard inquiry downgrades your CIBIL score; hence, you should avoid multiple loan applications from different banks simultaneously, as every rejection will further reduce your CIBIL score. Also, if your recent loan application has been rejected, do not immediately apply for another loan as it will negatively impact your CIBIL score.

Possible Reasons for Loan Rejection

Apart from having a poor CIBIL score, listed below are a few factors which can lead to loan rejection.

  • Regular borrower: It is simple, if you borrow money regularly or have multiple loans accounts in your name, banks are less likely to grant you additional credit as they fear that your existing debt to income ratio will further increase. Banks will also categorize you as a risky borrower, a risky borrower is one who borrows money on a regular basis. Your continuous dependence on credit can also have a negative impact on your CIBIL credit score and rating. A low CIBIL score is most likely to face higher loan rejections.
  • Previous/existing defaulted loans: If you default on a loan payment or act as a guarantor to a defaulted loan, it will affect your CIBIL rating. When you apply for a loan, the bank might outright reject your application, since you have been an existing or previous defaulter.
  • CIBIL remarks: Apart from your credit history and CIBIL credit score, CIBIL also holds a few comments as remarks on your finances. These remarks or comments can prevent your loan application from happening. In case you have missed out a payment, requested for favorable loan terms or payment of EMIs post the due date, all of the terms and conditions are mentioned as remarks and comments.
  • Unstable employment:Any form of instability in employment can affect your CIBIL credit score. Instability of your employer, salary not coming on time, frequent job changes can have a negative impact on your loan application process. Even changing your permanent address multiple times can hinder banks from approving your loan application. Banks only look for lenders who showcase stability in their work as well as financial environment.
  • Faulty credentials: As we all know, banks and financial institutions along with CIBIL collect your financial and non-financial information such as per KYC norms - name, age, address, current employment etc. This, at times, can create trouble for a regular individual, in case the credentials match with those of a previous defaulter. For example, if you have recently changed your rental address where the previous dweller was a defaulter, the bank might reject your loan application in order to prevent a forged loan approval.
  • Joint applications: Joint loan application with your sisters and friends are not accepted by the banks. Joint loans with your spouse, brother or parents is accepted in the banking industry.
  • Irregular tax payment: Banks also prefer potential borrowers who have a regular pattern of filing their ITR on time for the past 3 years. This brings about a detailed history with the government and credit rating agencies.
  • Previous rejected loan:If your previous loan application has been rejected, then this information remains with CIBIL and the bank. When you apply for a new loan, the current lender will get all these details from your CIBIL report and this might lead to a loan rejection.
  • Poor CIBIL record of the co-applicant:In a joint loan application, both, yours and your co-applicant's income is taken under consideration for the loan application guarantee. If your co-applicant has a poor CIBIL score, then your loan application has greater chances of facing rejection.
  • Secured/Unsecured loans:It is best to have a healthy mix of secured and unsecured loan accounts. Secured loans such as home and auto loan, are the ones where there is a collateral which the creditor can claim in case of non-payment. An unsecured loan is one which does not come with a guarantee of payment. A personal loan or a credit card is a type of an unsecured loan. If you have multiple accounts of unsecured loan, it is highly unlikely that the bank will give you a loan.
  • To many hard inquiries: When a bank or a financial institution request for a CIBIL record of an individual, it is known as a hard inquiry. If you apply for multiple loans at the same time from different lenders, each lender will conduct a hard inquiry. Also, multiple rejections will further downgrade your CIBIL score.
  • Savings portfolio:If you do not have a strong savings portfolio, your loan application will get rejected.
  • Confirmation of credentials: If the bank is unable to verify or confirm any of the required credentials, your loan application has higher chances of getting rejected.

FAQs

How to achieve a good credit score?

There are multiple ways to improve your existing credit score. The primary effort is to payback all your unsettled loans and outstanding debts, as repayment history accounts for nearly 30% weightage of your CIBIL score.

Should I cancel my credit card to improve my CIBIL score?

No, closing your credit card account will only reduce your existing credit limit and will push up your credit utilization ratio. A high credit utilization ratio will only lower your credit rating.

What is a joint loan application?

A joint application is an application you undertake with a co-applicant. This increases your chance of availing a loan if your co-applicant has a high CIBIL score and both, you and your co-applicant are entitled to tax benefits as per Sec 80C of the Income Tax Act, 1961.

What is credit utilization ratio?

A credit utilization ratio is a ratio which represents your spends to income, especially when it comes to a credit card limits. For example, if your credit card has a limit of Rs. 2000 and you utilize Rs. 800 a month, then your credit utilization if 40%. It is better to keep a low credit utilization ratio.

How to rectify a credit report?

If there is any discrepancy in your credit report, you will have to contact the respective credit bureau and submit a dispute resolution form. This process usually takes around 30 days.