When it comes to applying for a loan, your credit score plays a crucial role in determining whether your application gets approved or rejected. A good credit score not only increases your chances of getting approved but also helps in securing a loan with favourable interest rates. Shriram Finance, a prominent non-banking finance company based in India, understands the importance of credit scores and offers various credit solutions to individuals seeking loans for different purposes.
Whether it's a loan for a commercial vehicle, two-wheeler, car, home, personal finance, or small business, Shriram Finance has you covered. If you are wondering how loan rejection affects your credit score, then read ahead to know more.
Impact of Loan Rejection on Your Credit Score:
Yes, loan rejection affects credit score. Each loan rejection can lower your score by a few points, and multiple rejections within a short period can further decrease your creditworthiness. A bad credit score can have long-term consequences such as difficulty in obtaining future loans and higher interest rates.
Possible Reasons for Loan Rejection
1. Comments in CIBIL™ reports
In addition to numerical scores, CIBIL™ reports contain remarks and comments by lenders that can affect the loan approval process. If there are any remarks about settling loans or making payments after the due date, banks perceive these as warning signs and may reject your loan application.
For example, let's say you had the option to settle a loan for a slightly smaller amount than the agreed EMIs. While this might seem like a good option to reduce your debt burden, it could have negative implications for future loan applications. Banks will view this settlement as deviating from the original terms of the loan agreement and may reject your application.
2. Standing guarantor on defaulted loan
Being a guarantor for a defaulted loan negatively impacts your credit score and subsequent loan applications. As a guarantor, you are equally responsible for ensuring repayment by the borrower. If the borrower defaults on their loan, it reflects poorly on your credit history and affects your chances of getting approved for a loan.
3. Defaulter details matching
Banks and financial institutions maintain lists of individuals who have defaulted on their payments. If your submitted details inadvertently match those of a defaulter, your loan application may be rejected even before the bank checks your credit reports. Instances have occurred where individuals moving into houses previously occupied by defaulters have been matched with the defaulter's address records, leading to loan rejections.
4. Overleveraging
Overleveraging refers to having too many existing loans in proportion to your declared income. If you are allocating a significant portion of your income towards repaying multiple loans, banks may consider you overleveraged. This high debt-to-income ratio makes it difficult for banks to approve your loan applications as it raises concerns about your ability to manage additional debt responsibly. These loans rejected affect your credit score.
For example, if you earn ₹50,000 per month and are already paying ₹30,000 towards three different personal loans, you are left with only ₹20,000 for personal expenses and emergencies. Banks will view this as an unfavourable ratio and may reject your loan application.
5. Inadequate tax-paying history
Banks prefer individuals who have actively filed income tax returns for at least two years before the loan application. A consistent tax-paying history provides an additional measure of creditworthiness apart from the credit score. Lenders find it easier to assess the financial stability and repayment capacity of individuals with a documented tax-paying record.
6. Over-borrowing
Taking out too many loans within a short period can make banks wary of approving further credit. Regardless of whether you have successfully honoured these loans or not, excessive borrowing indicates credit hunger and raises concerns about your ability to manage multiple debts simultaneously.
7. Ratio of secured loans to unsecured loans:
Maintaining a favourable ratio mix of secured and unsecured loans is essential for loan approvals. Secured loans are backed by assets or a guarantor, while unsecured loans do not require collateral. Having a higher proportion of secured loans demonstrates responsible financial behaviour and strengthens your creditworthiness in the eyes of lender.
Conclusion
Loan rejections can significantly impact your credit score, making it harder to obtain future loans and leading to higher interest rates. It is important to be proactive in managing your finances and maintaining a good credit score. Regularly checking your credit reports and addressing any discrepancies can help ensure your credit score remains favourable.
At Shriram Finance, we understand the significance of a good credit score and offer various credit solutions tailored to meet different needs. Whether you need a loan for a commercial vehicle, two-wheeler, car, home, personal finance, or small business, we are here to assist you. Our offerings include fixed deposits and recurring deposits along with loans for diverse purposes. By choosing Shriram Finance, you can benefit from our expertise in providing reliable and trustworthy credit solutions tailored to your requirements. Maintain a good credit score and secure your financial future with Shriram Finance.
Key Highlights
- Loan rejection can negatively impact your credit score due to hard inquiries and potential implications on future lenders' perception of your reliability.
- You have the option to apply for a loan again after rejection; however, it's essential to address the reasons behind the rejection and work towards improving your financial profile.
- Having a good credit score does not guarantee loan approval as lenders consider multiple factors beyond just the credit score.
- While a rejected loan application does not directly affect your credit score, the hard inquiry made during the process can have a temporary impact.
Frequently Asked Questions:
1. What happens if a loan gets rejected?
If a loan gets rejected, it means the lender has determined that you don't meet their eligibility criteria. It doesn't immediately impact your credit score, but the application itself leaves a record on your credit report.
2. Can I apply for a loan after rejection?
Yes, you can apply for a loan after rejection, but it's advisable to understand why you were rejected and address those issues before reapplying.
3. Do loans affect your credit score?
Loan applications can have a minor, temporary impact on your credit score due to the hard inquiry made by the lender. However, responsible loan management can positively affect your credit score over time.
4. How long does refused credit stay on file?
Refused credit, or credit inquiries, typically stay on your credit report for up to two years, but they have less impact as time passes.
