8 Factors Affecting Loan Approval
Flush with cash due to government efforts for an economic kick-start, banks, in this post-covid era, are in a receptive mood towards loan applications. There are however some key factors upon which your approval relies on. Understanding these factors and fulfilling these criteria will give a boost to your approval chances.
Factors affecting your loan approval can be primarily categorized into aspects reflecting your income stability & growth, and your financial commitments & credibility. Following are the 8 key factors considered during your loan approval process
Income Stability and Growth Factors
Regularity of Income Flow
One of the most primary factors is that the applicant must have a steady and regular source of income which ensures that the repayments will be consistently met.
Frequent Job Hoping
For a working professional, job stability plays a significant role in building your creditworthiness. Multiple jobs, short tenure in each job portray an image of fickle-mindedness. You are not going to be trusted with money if you seem fickle.
Age of the Borrower
Borrower’s age is an important factor in his ability to repay the debt. Applications by those nearing their retirement age are perceived as a low propensity for repayment and hence are often rejected. Borrowers at their prime have a higher chance of income growth and reflect stability.
Financial Commitments and Credibility factors
Current Credit Utilization Rate
Multiple credits within a short span of time might be pursued as a high risk of default by the lenders. Using your credit card to the limit might also be perceived as inability to live within your means and overdependency on credit. It would be wise to get your credit limit raised in case you have a high requirement of credit so that the utilization doesn’t impact your score negatively.
Repayment History
A single default is reported by the banks and recorded in your credit history. Settlement and default raise a red flag in your credit history and impact your loan approval chances negatively. Regular repayment of loans helps build on your creditworthiness and improves your chances of approval phenomenally.
Credit Mix
Right mix of the various types of credit accounts, from revolving accounts like credit cards to installment accounts such as home loans, vehicle loans, and personal loans. Diversified credit ensures lenders of your financial acumen and helps gain their trust.
Credit Inquiries
Every time you apply for credit, there is an inquiry into your current credit score. Multiple inquiries may portray you as someone overindulging in credit. Each time you apply for credit — such as by applying for a personal loan, mortgage, or credit card — a hard inquiry is placed on your report. These inquiries stay there for two years. If you recently applied for a credit card, and car loan, you may want to delay your application for that home loan by a few months.
Rejection of a Previous Loan Application
Financial Institutions maintain a record of the loan applications that have previously been rejected. If your loan is rejected, the information is sent to the credit bureau and is thus reflected in your credit history. Apply for loans when in real need and avoid applying without proper financial backing.
While all of these factors influence your chances of loan approval, they do not carry equal weightage in the formula. Focus on timely repayment of loan and maintaining credit utilization rate at minimal levels. While some factors such as age and past-rejection are out of your control, you can help your cause by diversifying your credit kitty and achieving consistent growth in income.
For further help in improving your chances of loan approval, you can contact our debt counseling experts at Credit Monitor.
