Your Loan Got Rejected? Try this to Improve Chances of Getting Loan.

If you’ve recently applied for a personal loan and the application was rejected by the bank — don’t worry — as there are more banks out there, and many ways by which to approach the loan taking process.

Most people applying for loans simply estimate a rough amount they’ll need for whatever purpose, and apply blindly at all possible banks, which will result in a rejected loan application at least 80% of the time. Why? It’s because of the following reasons:

1. When you apply or a loan at many banks at the same time, all of them access your credit score information: Banks and lenders get an additional piece of information when they access someone’s credit score — they get to see who else has requested the information. If you’ve applied at 5 or 6 banks, they will all know that you have sent out applications to multiple banks, and will decide that this is either credit hungry behaviour or irresponsible credit behaviour.

A desirable client for a loan from a bank, in the bank’s perspective, is a person who knows exactly how much they want to borrow, which bank they want to borrow from, and the exact loan product they wish to borrow. Also, many lenders requesting your CIBIL or other CIC (Credit Information Company) credit report within a short span of time (1 month) negatively affects the way your profile is viewed by lenders.

2. You need to know exactly how much you want to borrow: Most people who require a personal loan are those stuck with no other options for quick funding of large amounts. When considering a personal loan, every financial expert will only advise that you exhaust all your other options like asking family, working twice as hard, etc. before taking out a personal loan. When actually taking out the loan, the total loan amount requested must be thoroughly calculated keeping in mind the requirements as well as the repayment capacity.

For example, Mr. A is taking out a personal loan to clear his dependants’ medical bills of Rs.1,50,000. He decides, instead, to take out a personal loan for Rs.2,00,000 as he has some other minor expenses and thinks that extra Rs.50,000 can be used for something productive — and he might as well borrow it right now.

What Mr. A doesn’t realize is that the extra Rs.50,000 will also be repayable with interest, and it would’ve been a lot easier to clear off a loan for Rs.1,50,000 (which is all he needed to borrow in the first place). The extra Rs.50,000 he’s borrowed will also increase his loan tenure, and effect his borrowing profile in the CIR (Credit Information Report).

3. It’s easier to borrow after communicating the reason for borrowing a Personal Loan: By definition, the funding secured through personal loans can be used for any purpose that’s up to the borrower’s own discretion. A personal loan can be used to purchase a home (instead of a home loan), it can be used to purchase a vehicle (instead of a car loan), clear off sudden medical bills, meet travelling expenses, meet emergency and unexpected expenses that could arise at any time, etc.

Because of this, many borrowers don’t communicate their reasons for borrowing (because they don’t legally have to) and the bank is supposed to take a call on whether the borrower is worth lending to based solely on information present in the CIR (Credit Information Report) and after studying past borrowing information. Most of the time, loan applications made with no intimation of where the funds will be spent end up getting rejected. Here’s what you can do to avoid this:

• Communicate the exact reason for borrowing to the bank branch manager.
• Put down on paper a detailed list of expenses for which you need the funds, and make sure the funds requested are just enough to clear off all these expenses.
• Communicate an exact requirement (I need Rs.6,54,700) instead of a vague figure (I need around Rs.5 lakhs to Rs.7 lakhs).
• If applicable to your particular borrowing scenario, show how these borrowed funds will be utilized in order to establish profit generation, and how the profit can be used to repay the loan.

Banks and lenders basically just want to know that they will get their money back.

Those are the common mistakes people make before applying, let’s now take a look at what the borrower can do proactively in order to get loans approved:

1. Apply with a co-borrower: Applying with a co-borrower is viewed very favourably by banks and lenders. Applying with a co-borrower also increases the total loan amount that you are eligible to borrow.

Banks take into account your credit history and perceived repayment capability before approving a loan or even deciding your eligibility for a larger quantum of borrowing. If you apply with a co-borrower such as a business partner or spouse, your repayment capacity gets added with that of the co-borrower — so technically, you’re eligible for a higher loan amount (almost double, depending on your co-borrower’s income and credit history) and you will probably get the loan on better repayment terms.

This also instils a sense of confidence in the lender that you are a capable borrower who has every intention to repay the loan — as both you and your co-borrower will be equally liable to repay the loan in full.

2. Apply with a clear plan: Don’t be like most people who just borrow blindly. Take a book and physically write down your exact requirements for funding, the reasons you need the funding, the total amount of funding required (divided by expenses/time/purchases/etc.) and your repayment plan.

For example, if you’re borrowing to establish a business — write down all your expenses, working costs, asset acquisition expenses, stock charges, utility and running costs, etc. and frame your loan amount required based on this. This is only to establish how much money you’ll need. Now the bank knows that you are an informed, responsible, and attentive borrower who knows exactly how much to borrow. But the bank has no data supporting your intention to repay (ability to repay and intention to repay are two different things).

Now it’s time to convince the bank that you can also repay what you’ve borrowed. This is as simple as explaining your business model. All you have to do is prepare a report that clearly states where the loan money will be spent — and how that money will be used to generate an income. Once you have a convincing report that says you will be making Rs.X amount of money every month/week, you can show the bank that your profits will aid you in repaying EMIs. It’s good practice to calculate this before applying — and using an online EMI calculator to make sure your EMIs are under the Rs.X amount.

If your personal loan is being used to pay off sudden hospital bills, or meet emergency expenses — you can convince the bank to lend to you by showing them your income proofs.

3. Negotiate with the lender on every factor of your loan from total amount required, repayment time and tenure, interest rate, etc.: Banks will approve any amount to any borrower (within reason, after considering income, credit history, and perceived repayment capacity) so long as they are clear that the borrower can repay what they’ve taken.

Banks have huge amounts of money in stock to lend out to worthy borrowers. This is to say that eligibility conditions and limits on the total amount that can be borrowed aren’t fixed for those who know how to negotiate. If your age, employment history, credit report, and income give you an estimated eligibility of Rs.10 lakhs for a personal loan — you can easily increase this eligible amount to Rs.15 lakhs by applying with the above reports of expenses and possible income (mentioned in point 2) — and of course — negotiating with the branch manager of the bank.