Did you apply for a personal loan and receive a rejection from the bank despite having a good CIBIL score? Though there are several grounds on which a bank can reject a loan application, one reason might be your repayment capacity.
While considering a loan application, the foremost thing that lenders see is the applicant’s monthly income. So, basically, your loan eligibility mostly depends on your repayment capacity. This applies to all loans, including personal loan. For personal loan seekers, the income level is one of the key factors because good monthly earnings, from salary or business, reduce risks for the lender.
You might find yourself in a situation where your CIBIL score is good, yet your loan application is rejected by the bank. In such instances, the threshold income becomes significant, as the lender may have assessed that your repayment capacity does not meet their expectations. All banks and non-bank lenders adhere to set guidelines when considering loan applications, and the threshold income level is a key component of these rules. The minimum income requirement for sanctioning a loan may vary from lender to lender as they use various methods and have different criteria to consider a loan application.
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What is the threshold income level below which banks don’t lend?
If your monthly income is less than Rs 20,000, the chances are that your loan application will be turned down by the bank. This threshold limit further increases as your loan amount rises. In case of non-bank lenders, this threshold income requirement is low.
“Lenders have a threshold income below which they will not lend. Usually, this limit is set at around Rs 20,000-Rs 30,000 a month, however, if your loan is of higher value, then the income requirements could be higher, and your application may be rejected if your income doesn’t meet the minimum income criteria,” said Adhil Shetty, CEO, Bankbazaar.com.
When you forward a loan application to a bank, the lender also notices the number of current loans in your name, besides your other obligations such as credit card payments and dues owed to any financial institutions.
Already have loans? A new loan application might get rejected
If you have existing loans, then despite having a high income, your loan application may be rejected if your Fixed Obligations to Income Ratio (FOIR) is high, says Shetty.
What is FOIR and how does it work?
FOIR helps a lender in assessing your repayment capacity. In essence, FOIR quantifies your fixed monthly expenses as a percentage of your net monthly income.
“FOIR takes into account all the fixed obligations that a borrower is supposed to meet regularly on a monthly basis, including house rent, existing debts such as credit card bills and EMIs on other loans, etc. The lower your FOIR the better, as it implies that you have sufficient income to repay your loan. Usually, lenders will not lend if your FOIR is more than 40%,” Shetty explains.
Conclusion:
Besides this, there might be several other reasons why banks reject loan applications. These reasons include low credit score, bad employment history, incomplete or inaccurate information in the application, multiple loan applications simultaneously, a lack of relationship with the bank, etc.
