Manish Rana, 29, needed an urgent loan for his mother’s medical procedure. Manish, a resident of Delhi, earns a six-figure monthly salary in a leading multinational company and had a healthy credit score. But his loan application was rejected by three banks within a month. The reason for rejection—Manish had changed five jobs in less than two years, which made his profile risky for the banks.
Yes, lenders don’t just look at income, age, existing debt and credit score of a loan applicant. They assess a host of different factors. What are these lesser-known factors?
Is your career stable?
Banks evaluate the professional profile of potential borrowers to assess their repayment capacity. Changing jobs frequently is considered a sign of an unstable career and job-hoppers are deemed less creditworthy. This works against them, particularly in case of unsecured loans such as personal.
Is your employer’s profile strong enough?
Those working with large MNCs, top corporate organisations or government employees are preferred by banks. Employees of small and medium-sized enterprises, especially those which do not have a vintage or a strong track-record, or those from an industry that is struggling, are at a disadvantage. Also, if an applicant works for an organisation that has several employees who have defaulted on loans, she/ he will be perceived as risky.
What is your FOIR?
Fixed obligation to income ratio or FOIR is the percentage of an applicant’s total income spent on obligations such as equated monthly instalment (EMI) and credit card dues. Usually, if your FOIR is above 50%, there are high chances your loan application will either be rejected or approved for a lesser amount. Take for instance an applicant who has an in-hand salary of ₹1 lakh a month and EMI obligation of ₹40,000. With FOIR of 40%, if you apply for a loan of ₹10 lakh for 5 years at an interest rate of 11%, it makes your additional EMI amount ₹21,000. To keep FOIR at 50%, a lender may choose to approve a loan of only ₹5 lakh. This will keep your additional EMI at ₹10,000 and total EMI obligation at ₹50,000.
Have you applied for multiple loans recently?
People looking for urgent loans often apply to multiple lenders. When this happens, each lender fetches the applicant’s credit report. With each enquiry from a lender, the applicant’s credit score goes down. Anyone who applies for too many credit products (this includes credit cards too) within a short span of time, will be considered ‘credit hungry’ and their application is likely to be turned down.
Defaulted on your credit card bill or EMI?
Every single time someone misses paying their EMI on a loan or fails to pay their credit card bill in full or are late, this is recorded on their credit report and stays there for a long time. Once a lender spots a default payment, it dents the chances of a loan approval.
Co-applicant or guarantor to loans?
A guarantor or a co-applicant of a loan is equally liable for repayment. When you apply for a new loan, the liability to pay the outstanding amount of the loan you are guarantor or co-applicant to, is considered by banks. This makes applicants ineligible for the new loan. These factors are in addition to the basic parameters that all lenders check. To ensure you meet those, first, check if your credit score is healthy – most lenders prefer a score over 750. Also, go online and check if you meet the age and minimum income eligibility of lenders. Income eligibility, however, varies from bank to bank and location to location.
Before you apply for a loan do a thorough research and zero in on one lender whose eligibility criteria meets your profile, and apply confidently.
Naveen Kukreja is chief executive officer and cofounder, Paisabazaar.com