Even A Credit Score of 800 won’t get you Loan, Do you know Why ?

One of my friends’ younger cousin Sumit who is 26 years old has started working a couple of years back.  He is software engineer and got the job at Hyderabad based IT company. Since he is originally from Mumbai so has to setup his house there and hence brought new furniture for his rented apartment and also brought a Car both on loans to start his new life in this new city. He got the loans easily based on his salary and credit score.

Then, there was a medical emergency in his family as his father was hospitalised and he was forced to apply for another personal loan to help his family with the medical expenses as his parents didn’t have the health insurance. He was sure his loan application would be approved as his credit score was 800+ and he was making timely payment of his education loan and credit card dues and also the recently taken car loan which had helped build a strong credit history. But for his surprise his loan application was rejected.

So what went wrong?

Well a good credit score is a must, but it doesn’t necessarily ensure that your loan application will always be approved.

Lt’s understand what went wrong

Sumit’s total EMI of Rs. 20,000/ - on his net monthly income of Rs. 50,000/- is already 40% of income. Let’s assume his living expenses of Rs 25,000/- after paying the EMI he is left with only Rs. 5000/- . So if he applies for say Rs. 3 lakhs personal loan for 3 years , he will have to pay the  EMI of approx Rs. 10,000/- and hence will be in net negative surplus money at the end of the month. As debt-to income ratio of over 50% made him unworthy of securing further credit, despite him maintaining a good credit score hence lender’s won’t be willing to extend extra loan to him. Further two of his three loans – education and personal loan – being unsecured didn’t help matters either.

So what should a Person do:

In today’s world after Credit Score is available for all the borrowers alongwith that lenders also see certain other things and hence we need to take care of them.

Firstly As a borrower we need to be careful about our cashflows and ensure that total loan to EMI should not be more than 40% of net take home income.

Secondly we should apply for loan only for a genuine purpose which is within our payable capacity.

Thirdly we should not approach multiple lenders at the same time as this could be counterproductive. This phenomenon is called as ‘loan stacking’ where a consumer makes multiple applications with different lenders at the same time in an attempt to get more than one loan before a lender realises that another lender has already given a loan to the applicant.

Fourthly it is better to apply from the same lender specially if you are regular in payments,as he knows you better and can extend extra money based on your past credit behaviour.

Finally use the internet and online options to research about various loan options so as to get a best deal based on your current profile.