If an applicant’s credit rating is too low, banks and financial institutes may not even offer credit at all. That said, there are several instances where a borrower’s loan application is rejected even with a good credit rating.
Due to the pandemic, a large number of people have faced a huge financial crisis, especially during the lockdown. However, even after the lifting of the containment, things are far from returning to normal, financially.
During this period, there are people who still lack money and find it difficult to keep up with their daily lives. Hence, people are considering taking out loans to help them during this crisis. You must have a good credit rating to get a loan approved.
Having a good credit score of 750 or higher will give you access to a wider range of lenders and better interest rates. When applying for a loan, or any other type of credit, a good credit rating can mean greater choice for the borrower in terms of lenders and loan offers, as well as interest rates and attractive fees.
Credit scores represent the borrower’s credit history as recorded in their credit reports. This credit report helps lenders understand how experienced and responsible the borrower is in dealing with their debts. Having a higher credit score means having a lower chance of defaulting on debts. Therefore, lenders consider it riskier to lend money to borrowers with low credit ratings than to those with high ratings. Lenders typically charge borrowers with lower scores more to compensate for their greater risk of default, and typically offer their best loan and credit deals (low interest rates and fees) to borrowers with lower credit scores. students. If an applicant’s credit rating is too low, banks and financial institutes may not even offer credit at all.
That said, there are several instances where a borrower’s loan application is rejected even with a good credit rating. As mentioned earlier, the credit score indicates how the borrower’s previous loans have been repaid. However, this says nothing about the borrower’s ability to repay more loans.
Banks and financial institutions also examine the ability of the applicant to repay additional debt, if they wish to assume more than a good credit rating. Banks and financial institutes verify borrowers while assessing their financial health. This is where most people fail to get a loan even after having good credit – other outstanding loans/debts. For example, if you have other loans that you are repaying, such as personal loans, car loans, education loans, home loans, etc., you could be rejected. This is because banks or financial lenders typically see a borrower’s debt-to-income ratio (DTI) to measure their ability to manage debt repayment. The DTI ratio is best calculated on a monthly basis, and having a low DTI shows that the applicant has a good balance between debt and income.
For example, if your monthly income is Rs 50,000 and you are already paying around Rs 25,000 for your outstanding loans, credit card charges, etc., there is a high chance that your application will be rejected. Lenders take an individual’s total monthly debt, which includes minimum credit card dues, car loans, student loans, home loans, and more. and divide it by that individual’s net monthly income. This shows lenders how much additional debt the individual’s financial situation will allow them to handle.
Experts suggest that in the long term, the borrower can reduce the overall debt burden by paying off dues with any additional cash flow. This will improve the borrower’s borrowing power in the future and he/she will have better control over his/her financial situation, especially in times of financial crisis.