Don’t make these 5 mistakes before applying for a loan
If you are going to apply for a loan or are planning to apply for a loan in the near future, many people make mistakes before applying, because of which their loan application gets rejected.
The most critical mistakes to avoid before you applying for loan
1. Neglecting your credit score and history
Whenever you apply for a loan in any bank, the bank first checks your credit score and credit report. Now here, the bank may check your CIBIL report or Equifax report. They may also check Experian’s report or CRIF High Mark report. In India, there are mainly these four credit bureaus. Some banks even check reports from two or three credit bureaus. For example, in SBI personal loans, they check at least two or three credit bureau reports before approving a loan. In some cases, for MSME loans, they may check only one specific bureau report.
Now the question is, if your credit score is low, your loan application can get rejected. Sometimes it is seen that the credit score is very good, but there is some error in the report. It may show a higher DPD (Days Past Due) or some negative status, due to which the loan application can still get rejected.
There is a solution for this. First, you should pull out your credit report. If you have not checked it before, you may get it for free the first time. There are also other free websites where you can check your report. First, review your report properly. If there is any error or your score is low, you can correct it. If there is any issue in the report, fix it first and improve your score. Only after that should you apply for a loan.
2. Not calculating your FOIR before applying
FOIR is a term that not everyone knows, especially those who do not work in banks. People who work in banking or deal with loans use this word frequently. It is an abbreviation, and its full form is Fixed Obligation to Income Ratio.
Now suppose a customer earns a monthly salary — they cannot use their entire salary to pay EMIs. This is very simple because they also have household expenses. Banks use a standard parameter: usually, 40% to 50% of a person’s monthly income can go towards EMIs.
So, if someone earns ₹50,000 per month, they can pay a maximum of around ₹25,000 as EMI. Now, if a customer has already taken a car loan and also has a personal loan, and they are already paying ₹25,000 as EMI from a ₹50,000 salary, then if they apply for another loan, their application may get rejected. Now, it is not always fixed at 50%. If someone earns ₹1 lakh per month, in that case, banks may calculate FOIR up to 60% to 65%. But generally, it does not go beyond that. There are solutions for this, which you can follow.
Solution
For example, if you have taken many small (micro) loans and are paying high interest on them, you can close those loans first and then apply for a new loan. This will reduce your EMI burden and improve your loan eligibility. In some cases, if a customer already has multiple personal loans or unsecured business loans, they can go for debt consolidation. For example, last month we helped a customer by arranging a mortgage loan. Initially, their eligibility was not sufficient because they had five unsecured business loans with very high interest rates — around 26% to 28%.
So, what we did was arrange a mortgage loan through a non-banking finance company. The interest rate was lower, around 14%. We used that loan amount to close all the existing loans, and whatever amount remained was given to the customer. This improved their eligibility and reduced their EMI burden.
In some cases, customers may have additional sources of income apart from their salary. For example, they may earn rental income or receive regular incentives. When applying for a loan, especially a housing loan, they can show this additional income. Based on that, their eligibility can increase, and their loan application is less likely to be rejected.
3. Submitting multiple applications simultaneously
Many people make the mistake of applying for loans in multiple banks and NBFCs at the same time. Don’t do this. Especially if you give your application to brokers, they often submit it to many banks simultaneously. Now suppose your loan application gets rejected in one place. After that, you apply to another bank where you might actually have been eligible. Even there, your application can get rejected because of multiple inquiries. Every bank has different rules.
Some banks allow up to 2–3 inquiries in a month, and beyond that, they may reject the application automatically. Some banks have rules like up to 6 inquiries within 3 months is acceptable, but anything beyond that can lead to rejection. So, sometimes your loan gets rejected just because of too many inquiries, even if you were otherwise eligible.
So, always keep this in mind. First, check properly and then apply for a loan. Otherwise, unnecessary rejections can happen, your inquiry count will increase, and your CIBIL score may also drop.
4. Stability issues: job hopping or large purchases
Banks also check job stability before approving a loan. If a customer frequently changes jobs, even if their salary is good, the loan application may still get rejected. Banks may feel that the employee is not stable in their job or may lose it soon.
When banks provide loans, especially large loans for long tenures, they need assurance that the borrower will continue earning and be able to pay EMIs. If the job is not stable, repayment becomes risky. That’s why frequent job changes can lead to rejection. So, avoid frequent job hopping. Even if your salary is high, it can still affect your loan approval.
Now, coming to large purchases — if you have taken a loan for a big purchase (like a car loan) and then immediately apply for another loan next month (like a personal loan), your application may get rejected. Even if you took a personal loan last month and apply again the next month, it can be rejected. The bank may think that you have already taken a loan recently, so why do you need another one so soon? This increases the risk in the eyes of the bank.
5. Not comparing lenders and rates
Whenever you apply for a loan, always check the interest rates offered by different lenders and carefully read the terms and conditions. Sometimes, people get a pre-approved loan and immediately take it because the process is very fast. But understand one thing — if you have received a pre-approved loan, it means you are an eligible borrower. You can also apply to other banks, and you may get a better deal there.
Another bank might offer a lower interest rate, lower processing fees, and fewer additional charges. So before applying for a loan, always compare interest rates, processing fees, penalty charges, and other criteria. Only after proper comparison should you proceed with your loan application.