Your loan application could be rejected even with a good credit rating


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Credit scores represent the borrower’s credit history as recorded in their credit reports.

Due to the pandemic, large numbers of people have faced a huge financial crisis, especially during the lockdown. However, even after the lockdown was lifted, things were far from being back to normal, financially.

During this period, there are still people who lack money and find it difficult to follow their everyday life. 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 more 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 debts. Having a higher credit score means you’re less likely to default on debt. Therefore, lenders find it riskier to lend money to borrowers with lower credit scores than to those with high scores. Lenders usually charge more to borrowers with lower scores to make up for their greater chances of default, and generally offer their best loan and credit deals (low interest rates and fees) to borrowers with high credit scores. . If an applicant’s credit score is too low, banks and financial institutes might not even offer credit at all.

Having said that, there are many instances where a borrower’s loan application is turned down even with a good credit rating. As mentioned earlier, the credit score indicates how the borrower’s past loans were repaid. However, this does not say anything about the borrower’s ability to repay more loans.

Banks and financial institutions are also looking at the applicant’s ability to repay additional debt, if they want to take on more than a good credit rating. Banks and financial institutes monitor borrowers while assessing their financial health. This is where most people don’t get a loan even after having a good credit rating – other outstanding loans / debts. For example, if you have other loans that you are repaying, such as personal loans, car loans, student loans, home loans, etc., you might be rejected. This is because banks or financial lenders typically see a borrower’s debt-to-income ratio (DTI) as a measure of their ability to handle debt repayments. The DTI ratio is best calculated on a monthly basis, and 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 dues, etc., there is a good chance that your application will be rejected. Lenders take an individual’s total monthly debt, which includes minimum credit card contributions, 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 run, the borrower can reduce the overall debt burden by repaying the contributions 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 during a financial crisis.

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