Shocked by a loan rejection despite a 700+ credit score? Here’s what’s going on

Before applying for a personal loan, most people consider their credit score and income only to determine their eligibility. An individual may have a decent credit score of 700+. Yet, in some cases, the loan application may still get rejected.

In this article, we will explore some of the reasons why a personal loan application may get rejected inspite of having a decent credit score.

Credit score is only one of the eligibility criteria

Banks and NBFCs have various eligibility criteria for personal loans and other types of loans. For example, a bank may specify the credit score eligibility criteria as 700 or higher. However, the credit score is only one of the criteria considered for personal loan applications. Even if you meet this criterion (credit score of 700+), your personal loan application can still be rejected if you don’t meet the other eligibility criteria.

So, what are the other criteria for a personal loan? Let us explore some of them.

DTI ratio

The debt-to-income (DTI) ratio measures the percentage of an individual’s monthly income that is going towards servicing debt. For example, suppose an individual’s monthly income is Rs. 50,000, and Rs. 20,000 is going towards paying loan EMIs. In this case, the individual’s DTI is 40%. Usually, the lower the DTI ratio, the higher the chances of a personal loan application getting approved, provided other eligibility criteria are met.

Banks and NBFCs have their internal guidelines to decide what constitutes a good or bad DTI ratio. Usually, most banks consider a DTI ratio of 35% or lower as good for approving personal loan applications. If your DTI ratio is higher than 35%, your loan application will be scrutinised more closely.

Some banks consider loan applications of individuals with a DTI ratio of up to 40 to 45% range. The bank may ask for additional documents or ask the applicant to bring in a co-applicant or a guarantor. The bank may approve personal loans to individuals with a higher DTI ratio on a case-by-case basis.

The higher the DTI ratio, the lower the chances of the personal loan application getting approved. If the applicant’s DTI ratio exceeds 45%, the probability of the loan getting approved decreases significantly.

While applying for a personal loan, check your DTI ratio. When calculating the DTI ratio, take the EMI for the personal loan you are applying for into consideration, along with other debts. If your DTI ratio exceeds 35%, take steps to reduce it before applying for the personal loan.

Minimum monthly income requirement

Your monthly income, along with other factors, helps the bank assess your repayment capacity. Most banks specify a minimum income requirement for approving personal loan applications. Banks specify the net monthly salary requirement for employees and the annual Income Tax Return (ITR) for self-employed individuals.

Some banks have different minimum income requirements depending on where the applicant is working. For example, the State Bank of India (SBI) website specifies a minimum net monthly salary of Rs. 20,000 for Government and Defence sector employees. The minimum net monthly salary requirement for corporate sector employees is Rs. 25,000.

The Kotak Bank website mentions the minimum net monthly income requirement as follows:

1. Rs. 20,000 for a Kotak Bank employee
2. Rs. 25,000 for a Kotak Bank salary account holder
3. Rs. 30,000 for a non-Kotak Bank salary account holder

So, before applying for a personal loan, visit the bank’s website to check the minimum income requirement. Evaluate whether you meet the income requirement for the personal loan.

Employment stability

A person’s job stability is important to ensure a stable monthly income, which can then be used to pay the personal loan EMI. Job stability can provide the base for financial stability. Hence, most banks specify job stability criteria for personal loans.

Some banks require a minimum tenure in the current organisation/profession. Some banks specify the overall job tenure requirement along with the minimum tenure in the current organisation. For example, the HDFC Bank website states that the personal loan applicant must have a job for at least 2 years, out of which a minimum of 1 year must be with the current employer.

Some banks have a separate minimum service requirement depending on where the applicant is working. For example, the State Bank of India (SBI) website specifies a minimum service of 6 months for Government and Defence sector employees. The minimum service requirement for corporate sector employees is 12 months.

If the applicant has changed multiple jobs within a short duration or has not completed the minimum required duration in the current organisation, the bank may reject the personal loan application.

At the time of applying for a personal loan, check the employment criteria specified on the bank website. Make sure you have the specified overall work experience and tenure with the current organisation.

Age

Most banks specify the age criteria for the personal loan. It includes the minimum age at the time of applying and the maximum age at the end of the loan tenure.

Some banks specify separate age criteria for salaried and self-employed individuals. For example, the ICICI Bank website mentions that the age criteria for salaried individuals should be between 20 and 58 years. For self-employed individuals, the applicant’s minimum age must be 23 years, and the maximum age at the end of the personal loan tenure can be 65 years.

Some banks specify the age range. For example, the HSBC website mentions the age criteria for salaried applicants between 21 to 60 years, and for self-employed applicants between 21 to 65 years.

Limited credit history

An applicant may have a short credit history of, say, 6 months or so. The applicant’s credit report data may not be sufficient for a proper credit assessment. Hence, the bank may ask the applicant to reapply after a few months, by which time the credit report may have sufficient data for credit assessment.

Other eligibility requirements

Some of the other eligibility requirements that some banks may have include the following.

Account requirements with the bank: Some banks require the applicant to have a current account/savings account (CASA) with the bank. For example, the HSBC Bank website states that the applicant must have an active HSBC current and/or savings account that has been open for more than 3 months.

Some banks require the personal loan applicant to have a salary account with the bank. For example, the State Bank of India (SBI) website specifies that the applicant (corporate employee) must have a Salary Package Account with SBI.

Educational qualification: Some banks specify the minimum educational qualification requirement for a personal loan. For example, the Kotak Bank website states that the applicant’s minimum educational qualification must be a graduation or a diploma.

Minimum stay period in a rented accommodation: If the applicant is staying on rent, some banks may specify a minimum stay period as an eligibility criterion. For example, the Airtel website states that if an applicant is staying in a rented place, they must have completed at least one year of stay at their current residence.

Personal loan approval

In the above section, we have discussed the various eligibility criteria that an applicant must fulfil for loans. The credit score is only one of the factors taken into consideration. The others include DTI ratio, minimum income, employment stability, age, and other eligibility criteria. So, only having a decent credit score of 700 or above doesn’t guarantee personal loan approval.

Banks consider a combination of the above parameters to assess the borrower’s overall eligibility for the personal loan. Hence, an applicant must fulfil all the personal loan eligibility criteria, with credit score being just one of them, to get their personal loan application approved.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.

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