You’re in a mad rush to get your hands on some much needed cash, when someone suggests a personal loan as a viable option. So you apply for one and wait patiently. But lo and behold, your loan has been rejected!
If you’ve been in this situation before, it’s frustrating to say the least. Especially, since you may have been desperately counting on those funds. But don’t fret just yet; your loan rejection could serve as a much-needed eye opener to help you fix possible red flags on your current financial status.
Understanding the cause or causes of rejection might improve your chances for getting your next personal loan application approved, if you do choose to apply again.
The Usual Reasons For Loan Rejection
Here are some some of the usual reasons banks deny you your loan.
You have bad credit history
Credit history is a reflection of your borrowing and repayment activities: it appears encouraging to banks if you make payments on time and have no arrears in the last 12 months. If you are a not-so-great paymaster and do indeed miss payments or worse yet, if you have defaulted on a loan, the bank might peg you as a risk.
But how do banks know about your history? Well, all of your credit card debt, loans, overdrafts and other borrowings from authorised financial institutions are on file at the Credit Bureau of Bank Negara Malaysia under the Central Credit Reference Information System (CCRIS).
Credit data provided by your bank to CCRIS over the past 12 months are captured in the system, which is then used to formulate a credit report.
In addition to credit reports from the CCRIS, banks also obtain details from Credit Tip-Off Service (CTOS), a private agency that collects information on financial litigation matters such as bankruptcy cases brought against individuals and companies.
Banks use these reports to infer creditworthiness as well as borrowing and repayment habits of an applicant.
Do obtain your own copy of the CCRIS and CTOS reports to suss out possible issues which the bank may have found unsatisfactory with your credit summary.
You have too many loans
If the bank finds that you are over-committed to too many loans: you might not get another one approved. The bank will look at your other loan commitments such as house and car repayments, credit cards dues and personal loans.
Though all banks will have a different threshold they use to decide if you are over-committed; the general rule is that most adhere to the 60% benchmark. Your monthly repayments should not exceed 60% of your net salary.
Though you might pay more in interest in the long term; if you really need a loan, consider taking a longer tenure to reduce the amount you pay monthly. This may help reduce your commitment level to fall within the bank's set limit.
Your salary falls short of the bank's requirements
Banks usually have a minimum income requirement for loan applications. But beyond this, some also set internal limits to how much someone can borrow based on their salary level. This differs from one bank to the next.
Banks are also less willing to consider commissions as part of the salary with which they consider eligibility. If the bulk of your salary comes from sales' commissions, you may have a problem obtaining a loan.
Many bankers are well-versed with approval rates and the probability of success you have. As such, if you are concerned, it is worth talking to your bank representative first about possible snags in your application.
If your salary is on the lower side, some banks will still offer loans but the interest rate will be higher.
You have no credit history
Bad credit history will likely be the death of your application but so will it be if you have no credit history.
It’s not a bad thing to have zero experience with loans or credit cards, but how are banks supposed to gauge your reputation as a solid paymaster? A proven track record of timely repayment shows the bank that you understand the commitment before you, as you have upheld your end of the bargain in the past.
However, this doesn't have to be the nail in the coffin for your loan application. Some banks are willing to overlook this by offering a smaller loan amount on higher interest. You may need to apply at more than one bank but do take care to space out your applications.
What Can You Do if You Have Been Turned Down?
First-off, go ahead and turn that frown upside down, it’s not the end of the world. In fact, it’s just a little wake-up call from a financial standpoint about your creditworthiness.
You’ll simply need to make a few changes to improve your credit standing.
Here are some quick to-dos to help you on your way:
Knowing the problem is the first step. It could be just one major concern or a combination of issues that led to your rejection. You will need to speak directly to the bank for an answer. Not all bank officers will be so helpful. If they keep mum, try the next step.
As mentioned earlier, it’s a good idea to obtain your personal report from CCRIS and CTOS. Once you’ve done that, scrutinise the report details for possible disputes. If you find any, do get in touch with the bank in question to seek clarification and resolution ASAP.
Where possible, clear off unsettled debt. Additionally, if you have dues with utility companies, it could appear on CTOS reports, and stay there indefinitely. So be sure to check and clear those payments as well.
Once you’ve made these changes, step back and give it a bit of time. Why? Because the CCRIS database will show all accounts in arrears for a period of 12 months.
This means that even after it has been cleared, the record will reflect late payments for at least one year. You can find out more about clearing your credit history from our guide.
It’s also important to note that many personal loans in Malaysia are unsecured ones, meaning there is no guarantee to lenders that the borrower will pay it back.
This is why creditworthiness is of utmost importance to banks when deciding on personal loans. Interestingly enough, each bank has a different way to measure and define creditworthiness.
Meaning, if you’ve been denied a personal loan at one bank, it is not necessarily true that other banks will also decline your application. Thus, you might want to consider applying again if cash is needed for serious and urgent matters.
Best of luck!