Do you want to take out a personal loan or a home loan and it is not getting approved? This can happen with anyone. Therefore, you should know about the mortgage refusal reasons. The idea is to ensure that when you apply for a home loan or a loan for business then you are ready with everything. These reasons for loan rejection will help you take all the right steps. These details also change with change in loan type. For example, if you are taking out a loan for a car or buying a house the bankers have different conditions for approval. Therefore, in this article you can check the reasons why your bank rejected the loan and what you need to do now.
Top 11 Reasons for loan rejection
Banks refuse a loan due to many reasons but here is the list of most common loan rejection reasons.
1 – Bad Credit Score
When you want to take a personal loan then this is the most common criteria for loan approval. A poor credit score can cause straight rejection. Therefore, it is better not to apply for a personal loan if you have a bad credit history. I recommend that you first of all improve your credit score and focus on paying debts slowly. With time your credit rating will go up and your credit score will improve.
This is also one of the first reasons for credit bureaus giving a poor credit rating. Therefore, you must make sure that you are paying debt on time. Only then you will not see any reasons for loan rejection.
2 – Documents
Banks check all the documents that you present at the time of taking a loan. Sometimes they also verify the documents. For example, your salary certificate or income proof does not match a bank statement. Banks believe you are submitting fake documents. As a result you will see a loan application rejection. Therefore, make sure you only submit the correct document while taking a loan otherwise this will work as one of the reasons for loan rejection.
3 – Inconsistent Income
All financial institutions want assurance that you will pay back the loan. This assurance comes from your income certificate or your salary slip. This happens mostly when you are running a business. Especially, when you are starting a business of your own then nobody is there to create a salary slip. Additionally, many small business owners also do not take out a regular salary from business. Due to this their income is very inconsistent. Even the salary in jobs does not come on time in many cases. This is one of the many reasons for loan rejection because banks believe your career is unstable.
4 – Secured vs unsecured loans
The primacy difference between secured loans and unsecured loans is asset based security. The bank gives a loan against an asset in case of secured loans. For example, a car loan and home loans come under the secured loan category. In case of a payment default, banks can take possession of the house and sell it to recover the home loan. Similar is the case with car loans. Therefore, you can get easy approval for home loans and car loans. Personal loans require more documentation, scanning of profiles and checking income proof.
5 – Previous loan rejections
Financial institutions also look for previous loan rejections. For example, you apply for a credit card or personal loan. This one gets rejected from a reputed bank. This works as one of the key reasons for loan rejection. Because other banks believe that the reputed brand has a systematic process for loan application and rejections.
6 – Unpaid Dues showing on Credit Report
If you have some unpaid dues in your credit report, banks may not approve your loan. They consider you as a defaulter. The bank loan approval process includes checking all your financial details carefully. From the credit report to the recent bank statement, they check everything. There are two types of unpaid dues that become reasons for loan rejections. First is the Write-Off amount and other is the fee on credit cards that you are not using.
For example, you are using a credit card and you believe it is paid off. Banks charge a small amount of fee on it. If you are not alert about your finances, the amount will keep on growing. You will only come to know about it at the time of loan application. Therefore, clear the dues before they become reasons for loan rejection.
7 – Multiple Credit Inquiries – Also among reasons for loan rejection
This happens to many of us. For example, you are getting calls for personal loan or a car loan. You do not have any reasons to take out a car loan but you ask the caller to check. There is a negative impact on the credit report if companies regularly do inquiries on credit reports. You may have a reason to buy a car. But you just added some reasons for loan rejection in the form of inquiry.
8 – Loan Rejection due to Age
Most banks have age criteria before approving a loan. Especially when you are taking out a home loan, banks check your age. Home loan duration can go up to 20-25 years. For example, If you are over 50 years of age, you better avoid filing an application. The average retirement age is 60 years in many countries. In most cases, people do not get pension in private jobs and some government jobs also. As a result, you will start to default on your home loan. Banks already know this. Therefore, banks avoid giving loans to anyone over 50 years of age. There is a different criteria for every loan type.
9 – Recent Loan Default
Banks are very cautious about your recent loan defaults. If you have a loan default on your credit report, banks take it very seriously. Normally, executives recommend you to take care of loan defaults before applying for a fresh loan.
10 – Income Tax Return Filing
Income tax return filing (ITR filing) is very important. Banks may ask you to show at least two years of income tax returns copy. ITR shows exact information about how much money you make. If your ITR is good then the chances of loan approval are good. Otherwise, this can become one of the reasons for loan rejection.
11 – Job Stability
How frequently you change jobs may impact your loan approval process. Banks give you a loan for a few years. They want the money to come back with interest. That’s why the preferred choice is a stable job and regular income. Amount may vary but a stable job works great. Above all, if there is salary inconsistency, be ready to take a loan rejection.
Frequently Asked Questions about Reasons for loan rejections
Here is a list of questions that people ask on a regular basis about reasons for loan rejection.
Is home loan a secured loan?
Yes, a home loan is a secured loan. Banks keep the original copy of the house registration until you pay off the home loan completely.
What is a personal loan? Secure or Unsecure?
A personal loan is a short term loan that you take for any personal requirement. You can get personal loan approval only with a good credit score. Your credit rating is one of the major reasons for loan rejection.
How can I check my credit score for free before applying for a loan?
This is a good idea. First of all, the best thing is to get a detailed credit report from the credit bureau. Normally this is paid. Additionally, there are companies providing a free credit report. You can create a free account with them and check your credit score free of cost.