Imagine this: Raj earns ₹2.5 lakh a month and has a well-paying job at a reputed company, yet his personal loan application gets rejected. Why? Let’s find out.
It might be a bit bewildering to have your loan rejected despite earning a good monthly income. The truth is, while income is a major factor in loan approval, it’s not the only one. Your credit score, repayment history, documents, and existing loan obligations are equally important in determining your creditworthiness.
What Lenders Eye
Before you approach a lender, make sure to keep the following in proper shape and order.
The Three-Digit Number That Says It All
This is by far one of the most important factors that lenders consider. Your credit score reflects your credit health. A score above 750 is well received, while a lower score can be a cause for concern. A credit score of 800 and above can help you secure a loan at a lower interest rate.
If your score isn’t within the preferred range, here are a few ways to improve it:
- Avoid Late Payments
- Check Your CIBIL Report for Errors
- Lower the Credit Utilization
- Maintain Healthy Credit Mix
- Do Not Exhaust the Available Credit Limit
- Do Not Close Old Accounts or Credit Cards
The Impact of Past Payments
Missed an EMI on an old loan? That could be a problem. Lenders view your credit report to understand how responsible and consistent you have been with repayments and even a single missed EMI can be a red flag.
If you’ve missed an EMI in the past, here’s how you can limit the damage and improve your chances of loan approval:
- Clear the missed EMI amount as soon as possible instead of waiting for the next cycle.
- Contact your lender and inform them of the reason for delay.
- Do not miss any further EMIs. Keep sufficient funds always available in your bank account.
- Be up-to-date with your credit report to ensure everything is accurate with no errors.
- Be consistent with future repayments to slowly build your score
How Heavy Is Your Debt Load?
Debt-to-Income Ratio = (Total Monthly Debt ÷ Gross Monthly Income) × 100
Example: Calculating Debt-to-Income Ratio
Let’s say you have the following monthly obligations:
- Home Loan EMI: ₹30,000
- Car Loan EMI: ₹10,000
- Credit Card Payments: ₹5,000
Total Monthly Debt = ₹30,000 + ₹10,000 + ₹5,000 = ₹45,000
Your Gross Monthly Income = ₹1,20,000
Current DTI: 45,000 ÷ 1,20,000 × 100 = 37.5%
Now, suppose you apply for a new personal loan with an EMI of ₹15,000. Lenders will add this new EMI to your existing debt while assessing your final DTI.
Revised Total Debt = ₹45,000 + ₹15,000 = ₹60,000
Revised DTI = 60,000 ÷ 1,20,000 × 100 = 50%
So, while your current DTI is 37.5%, after including the new loan, it increases to 50%, which is above the preferred 40% mark and may affect loan approval.
Tip: Opting for a longer loan tenure will lower your monthly EMIs, which in turn can bring your debt-to-income ratio within the lender’s preferred range.
The Career Consistency Factor
Let’s understand this with Raj’s example. While Raj earns a salary of Rs. 2.5 lakh per month, his record shows frequent job changes, gaps in employment, and his current job is only three months old. For lenders, this can be a concern, as a lack of consistent income flow may hamper timely EMI payments. In terms of work stability, lenders prefer:
- At least 1 year in current job for salaried
- Minimum 3 years of business experience for self-employed
Tip: If possible, wait until you have completed at least a year before applying.
Document Accuracy:
Even a small typo can be a hurdle to your loan. Incomplete, outdated or mismatched documents can pace down or derail your loan application, even if you meet all other criteria.
Tip: Always cross-check that your PAN, Aadhaar, income proof, and address details are correct and updated.
Myths vs. Facts
| Myth | Fact |
| A high income guarantees loan approval | While your income plays an important role, other factors like your credit score, credit profile, income stability, etc, are equally important. |
| A single missed EMI won’t matter much. | Even one missed EMI can raise red flags and hurt your credit score. |
| Debt-to-income ratio is not an important factor. | Yes, it is. Lenders typically prefer it under 40%. Anything higher signals financial strain. |
| Frequent job changes are okay if your salary’s high. | Employment instability or job gaps can weaken a lender’s confidence in your ability to repay. |
| Minor document errors are not a big deal. | Even small discrepancies in documents can delay or derail approval. |
| “Pre-approved” means your loan is guaranteed. | In reality, pre-approval is just an early indicator, not a final approval. The final approval still depends on verifying your documents and profile. |