Loan rejected despite high income? Here’s what you need to know

Imagine this: Raj earns ₹2.5 lakh a month and has a well-paying job, 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 which is determined by your credit history. A CIBIL score (credit score provided by CIBIL) above 750 is considered good usually, while a lower score can be a cause for concern. A strong credit score can help you secure a loan at a lower interest rate.

If your credit score is low, here are a few ways to improve it:

• Pay all outstanding debt, ensure there are no DPDs in your credit report
• Avoid late payments of EMIs and Credit Card Bills. Pay in full and on time
• Check your CIBIL Report for errors or fraud
• Lower your credit utilization, in case you are maxing out your credit cards regularly
• Maintain a healthy credit mix, ensure you don’t have too many unsecured credit accounts
• Do not close old accounts or credit cards to maintain a longer credit history

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 the 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 ÷ Net Monthly Income) × 100

Example: Calculating Debt-to-Income Ratio

Let’s say you have the following monthly obligations:

• Home Loan EMI: ₹50,000
• Car Loan EMI: ₹10,000
• Credit Card Payments: ₹5,000

Total Monthly Debt = ₹30,000 + ₹10,000 + ₹5,000 = ₹65,000

Your On-hand Monthly Income = ₹1,20,000

Current DTI: 65,000 ÷ 1,20,000 × 100 = 54%

Now, suppose you apply for a new personal loan that would have an EMI of ₹15,000. Lenders will add this new EMI to your existing debt while assessing your final DTI.

Revised Total Debt = ₹65,000 + ₹15,000 = ₹80,000
Revised DTI = 90,000 ÷ 1,20,000 × 100 = 70%

So, while your current DTI is 37.5%, after including the new loan, it increases to 50%. Lenders usually prefer DTI to be within 50%-55%.

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. Do note, this will increase the total interest cost of the loan though.

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
• The profile of your employer is also key. Those working with MNCs, established companies and Govt employees are preferred by lenders generally

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 55%. 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 a strong, early indicator that you would get the loan, but not always the final approval. The final approval still depends on verifying your profile, and in some cases, certain documents also need to be provided.