In today's modern world, people require loans for many different reasons. This includes home loans, car loans, personal loans, loans for business, etc. Whatever the reason may be, a loan is a great financial aid that helps people out in many ways. However, not everyone's application for a loan gets approved. Many different criteria set in place by most banks and financial institutions must be met to obtain a loan. Naturally, banks cannot provide each and every applicant with a loan. Some factors must decide whose application will get approved and whose application will get rejected. Most of all, lenders must feel that their money is in safe hands so that they are at risk of a loss because of default payments. One of such criteria that helps them decide this is having a good CIBIL score.

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What is a CIBIL Score and Why Does it Matter While Getting a Loan?

A CIBIL score, a person's credit score, is a three-digit number that can fall between 300 and 900. Four Credit Information Companies (CICs) in India are responsible for calculating a person's credit score. This score is assigned to each individual based on their past financial behaviour and credit usage. Most lenders require borrowers to have a CIBIL score of 700 or higher, reflecting that they have been financially responsible in the past and are worthy of additional credit. This score is calculated based on a mix of various factors.

Lenders give large sums of money to borrowers and want to be as assured as they can be of getting their money back on time and with the interest amount. To do so, they need a way to judge a particular borrower's ability to repay the loan. A CIBIL score and CIBIL report serve exactly this purpose. Lenders look at the CIBIL score and get an idea of the applicant's ability to repay the loan. The higher the score is, the more confident they feel about giving a loan to the person. A good CIBIL score builds a lot of trust in the lenders, and they feel assured of getting their repayments on time.

However, remember that a good CIBIL score is just one factor that decides your eligibility for acquiring a loan. A loan application can be rejected by a lender even if the applicant has a very high CIBIL score. This can happen because of a variety of reasons. Let us explore them one by one:

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Other Shortcomings in the CIBIL Report

A CIBIL score is a part of a larger document known as the CIBIL report. As the name suggests, an individual's CIBIL report is an in-depth account of their entire credit history. This report includes details about ongoing and paid-off loans, loan enquiries, credit card usage, etc. If lenders find that the report reflects a good CIBIL score but has some other shortcomings, they will likely reject the loan application. This could be a poor remark, such as a loan being "settled" or "written-off". Both these remarks are reflections that the person has been unable to pay off a loan in the past and had to reach some sort of a compromise with the lender. Naturally, future lenders will find themselves at a higher financial risk by providing a loan to someone with such a history and, therefore, will most likely reject the application.

Taking Too Many Loans

Reasons For Loan Rejection Despite a Good CIBIL Score also includes taking many loans. It does not matter if an individual has been able to pay off the acquired loans on time. Taking too much loan and borrowing so much money shows the person in a negative light. Taking too many loans or even frequently enquiring for credit is seen as a sign by banks and other lenders that the person is highly dependent on credit. This, in turn, paints the individual as a risky applicant and can lead to rejection of their loan application. Over-borrowing money reflects financial instability on the part of the borrower, and financial instability equals a high risk of default payment for the lender.

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Debt to Income Ratio

A person's debt-to-income ratio is one of the most crucial factors determining whether their loan application will be approved or rejected. But what does this debt-to-income ratio mean, and what does it signify? In the simplest terms, this ratio refers to how much of a person's income can be used to clear off his debts. You also require a large income to pay off large loans. If you have too many loans and insufficient earnings, you will find it very challenging to qualify for more credit. This would mean that you are over-leveraged. In order to get additional loan applications approved you would need to show an increased income as well so that the lenders would know that you have the ability to pay back your dues on time. If an increase in income does not seem possible, you must first clear off your existing loans and become debt-free to find yourself eligible for more loans. Therefore, an unfavourable debt-to-income ratio can lead to the rejection of your loan application even if you have maintained a good CIBIL score.

Unhealthy Credit Mix

Did you know that there are two different kinds of loans and credits? One is a secured loan, and the other is an unsecured loan. A secured loan is given after keeping some asset or property of the borrower as collateral against the loan. Since it acts as a safety net for the lender, it is called a secured loan. On the other hand, unsecured loans have an increased risk factor since no collateral acts as a protective layer for the lender. It is advised that one maintains a good and healthy balance of secured and unsecured loans so that banks can invest their trust in them. If you have more unsecured loans as compared to secured ones, the chances of your loan application getting rejected are higher despite having a great credit score.

Read More:: Is 720 a Good CIBIL Score?

Loan Rejection in the Past

As informed earlier, your CIBIL report contains your entire credit history. This means that it also keeps a record of all of your loan applications in the past and whether they were approved or rejected by the lender. If your CIBIL report reflects that any of your loan application was rejected, it could lead to more applications being rejected. This is because lenders check why your application was rejected in the past and consider it a warning for themselves. A loan rejection in the past indicates a shortcoming in your credit report and makes it challenging for you to obtain more loans in the future.

Discrepancies in Credentials

There can be reasons for the rejection of your loan application that are not related to your credit report at all. For instance, if there is any discrepancy in your credentials, documents, personal information and details, banks cannot approve your loan application. No documents must be missing and all your personal information is correct and updated. If not, you would face rejection even if you have the best CIBIL score and a great CIBIL report as well.

Read More:: What is the Use of CIBIL Score?

Conclusion

Many factors contribute towards deciding if a person's application for a loan will be approved by a lender or not. One of these factors is their CIBIL score. A good CIBIL score is a must to get a loan application approved since it decides an individual's creditworthiness. However, other factors decide eligibility and a person's loan application can be rejected even if they have an excellent CIBIL score. There are many different reasons for this. Any other shortcomings in the CIBIL report can lead to rejecting one's application, such as remarks like "settled" or "written-off" along with a past loan that reflects an inability to pay dues on time. Enquiring loans too frequently is another reason loan applications are rejected because: they paint the applicant as highly dependent on credit and even credit-hungry. One must also focus on maintaining a healthy mis of secured as well as unsecured credit and aim at the number of secured loans outweighing unsecured ones. This increases confidence within the lenders regarding your ability to repay the loan. If a person has faced a loan rejection in the past, it will be recorded in the CIBIL report, and prospective lenders will view it as a negative sign. This can also lead to a rejection of one's application. Last but not least, any wrong personal information or missing documents can get an application rejected even if the applicant has a very satisfying CIBIL report and a high CIBIL score.

Frequently Asked Questions (FAQs)

Is CIBIL score important for getting a loan?

Yes, CIBIL score is a very important factor that decides your eligibility for a loan. A score above 700 is often considered a good CIBIL score and can help you get your loan application approved. However, having a good CIBIL score is not guaranteed to approve the application. Many other factors can lead to your loan application being rejected despite having a good CIBIL score.

Can I apply for a loan again if my application has been rejected before?

Yes, you can apply for a loan again if your application has been rejected before, but you must improve upon what led to the rejection, especially if you are applying to the same lender. Apply after a couple of months after improving your situation. If your application was rejected, chances are high that other prospective lenders will also reject it if you have not rectified the shortcomings.

Can I get a loan with a low credit score?

While having a low credit score makes it difficult to obtain a loan, it is not altogether impossible. Some lenders still might provide you with a loan. However, chances are high that the loan terms will be unfavourable for you. You might get a lower than desired loan amount sanctioned and face unusually high interest rates.

Why is a CIBIL score required when applying for a loan?

A CIBIL score is required when applying for a loan because it tells the lenders of your creditworthiness. This number reflects your credit usage and behaviour in the past and how responsibly you have handled credit earlier. A higher number shows that you pay your dues on time and lenders trust you more easily, whereas a lower score makes you seem like a risky applicant.

What does it mean if a bank says I am over-leveraged?

If a bank or another lender tells you you are over-leveraged, you have an unfavourable debt-to-income ratio. This ratio refers to how much of your income can be used to pay off debts. A higher debt amount and lower income mean that you are over-leveraged and cannot be given more loans since you do not have the required income to pay it off.

How many personal loans can I get at one time?

There is no assigned limit to how many personal loans a person can have at once, but many contributing factors decide how many loans you can have. For instance, a good debt to income ratio is a must to have a larger number of loans. One needs enough income to pay off debts. If you are unable to show sufficient income, lenders will not find you able enough to pay off more debt, and your loan will be rejected.