Prashant had applied for a home improvement loan of about Rs 1.5 lakh. His loan application was rejected and he never got to know the reason why. Prashant is not alone. His colleague, who applied for a home loan to the tune of Rs 30 lakh, had no bad credit history and was drawing a decent salary. His loan application too got rejected despite providing all relevant documents. Both the applicants are disappointed at being charged a big 1.5 percent processing fee that is non-refundable.
Why are loans rejected?
Loans are often rejected when the lender perceives that there is a probability that the borrower will default on repayments. It is in their interest that banks perform a background check on most loan applicants. Apart from bad credit history, submitting incorrect information to the banker, unstable job, debt to income ratio and wrongly filling the application form can be a possible cause for rejected applications. Further, the property for which one seeks a loan must not be under any legal dispute and must have clear title. If the borrower’s income is too low and he seeks a large loan, banks are likely to reject the application. The monthly repayment amount must not be greater than 30 percent of monthly take-home salary.
What do you lose if your loan is rejected?
You zero in on a new dream house, negotiate price with the builder/seller and find a bank who lends at an affordable rate. The first thing that affects the applicant when his loan application is rejected is the big emotional hurt. However, an applicant must bear in mind that being denied a loan is not a black mark on your credit record. Different lenders have different standards and lending criteria. So if one lender has rejected your application, it does not mean no one else will finance your needs.
Borrowers must bear in mind that in case their loan application is rejected, they will lose any non-refundable fees they might have paid. If you’ve paid any non-refundable application fee it is time to forget it and move ahead. This fee is usually used by lenders to meet expenses for verifying the applicant’s credit report, appraisal and other processing costs that they may incur.
What should you do next?
In most countries, it is essential for the lending agencies to inform the applicants within a period of 30 days, on why their loans were rejected. The Reserve Bank of India (RBI), in its recent directive, states that in case of all categories of loans, irrespective of any threshold limits, including credit card applications, banks should convey in writing the main reason for which the bank has rejected the loan application.