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6 Ways to Reduce The Chances Of Loan Rejection

Building and maintaining good credit score is one of the most crucial steps towards improving loan eligibility

Lenders consider several factors while evaluating loan applications. The chief among them is the loan applicant's credit score, monthly income, job profile, and employer’s profile. Those who fail to match the thresholds set by the lenders can get their loan applications rejected. Here are some tips to reduce the chances of loan rejection:

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Work Towards Building A Good Credit Score

Building and maintaining a good credit score is one of the most crucial steps towards improving your loan eligibility. Lenders usually prefer to lend to those having a credit score of 750 and above. On the contrary, those having a lower credit score are considered to lack credit discipline and hence, are more likely to default on repayments. 

Hence, those planning to avail loans should focus on building and maintaining a good credit score by adopting healthy financial habits like timely repayment of EMIs and credit card dues, containing their credit utilization ratio (CUR) within 30%, maintaining a good credit mix and closely monitoring co-signed or guaranteed loan accounts.

Review Your Credit Report At Regular Intervals

Credit bureaus calculate your credit score on the basis of the information provided by lenders and credit card issuers in your credit report. Hence, any incorrect information in your credit report due to clerical errors made by the lenders or the credit bureau, or because of any fraudulent loan or credit card activity made in your name, can adversely impact your credit score. This, in turn, can negatively impact your loan eligibility. 

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Hence, review your credit report at periodic intervals. This will provide you with sufficient time to detect and report incorrect information to the concerned bureau or lender for rectification. A rectified credit report will automatically increase your credit score.

Compare Loan Offers Of Various Lenders

The interest rate, processing charges, or tenure for the same loan type can differ widely due to the variation in the lenders’ cost of funds and the credit risk assessment of individual loan applicants. Hence, loan applicants should compare the loan offers from as many lenders as possible before making the final loan application. 

As many lenders might provide preferential rates or/and other terms and conditions to their existing customers, a prospective loan applicant must first directly contact their banks and lenders with whom they share an existing deposit and/or lending relationship. This should be followed by approaching online financial marketplaces to compare interest rates and various other loan features offered by other lenders. Doing so would assist you in getting the best deal based on your loan requirements and eligibility.

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Select Tenure Based On Your Repayment Capacity

Your loan repayment capacity will primarily depend on your monthly disposable income after factoring in monthly mandatory expenses, existing EMIs, insurance premiums, and investment contributions towards unavoidable financial goals, among others. Lenders prefer to lend to those having total repayment obligations, including the one for their new loan, to be within 50-60 per cent of their monthly income. Hence, those exceeding the set limit have lower chances of loan approval. 

Applicants exceeding this limit should try to reduce their loan repayment obligations by prepaying/foreclosing a few of their existing debts, opting for longer loan tenures, and/or by making a higher down payment for their new loans.

Once you know your repayment capacity, opt for the shortest repayment tenure to reduce your interest cost. Applying for a loan after knowing your optimum EMI would also reduce the chances of defaulting in the future.

Avoid Submitting Loan Enquiries With Multiple Lenders

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Whenever you apply for a credit card or loan, the issuer/lender requests your credit report from the bureau to assess your creditworthiness. Such credit report requests from lenders are considered hard inquiries, each of which can reduce your credit score marginally. Hence, making multiple loans or credit card inquiries within a short span can significantly reduce your credit score. Instead of submitting loan applications directly with multiple lenders, approach online financial marketplaces to know the optimum loan offer available as per your credit score, job profile, income and various other eligibility criteria. While these marketplaces too would fetch your credit report while offering loan options, requests made by online financial marketplaces are considered soft inquiries and do not impact your credit score.

Avoid Frequent Job Switches

Lenders consider the employment stability of salaried loan applicants while evaluating their loan applications. As lenders consider frequent job-hopping as a sign of career instability, those changing their jobs frequently may have lower chances of getting their loans approved. Hence, those planning to apply for loans in the near future should avoid frequent job switches.

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The author is Senior Director, Paisabazaar.com 

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly. 

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