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Top Reasons for Personal and Business Loan Rejection

Updated on March 1, 2024 , 914 views

Getting a loan for any requirement, be it for home, business or personal use has several criteria that you need to meet. However, it can be done in just a matter of a few days if you meet all the requirements specified by the banks. But there are specific reasons why your loans can get rejected by a Bank, regardless of how thorough you were with the application.

Top Reasons for Loan Rejection

This article contains a list of the most common reasons a bank would cite for your loan application rejection. Let's find out.

Personal Loan Rejection Reasons

This is ideal for you, whether you are looking for the HDFC personal loan rejection reasons, ICICI Personal Loan Rejection reasons, or any other ones. Here are some common reasons for them:

1. Credit Score Issues

One of the first things a lender will do after you've applied for a personal loan is to check your Credit Score. In India, CIBIL is among the most well-known companies that give credit score information to lenders. If the CIBIL Score is 700+, you are deemed suitable for a personal loan, and you will likely be approved. However, if it is below 700, your loan application will be rejected.

2. Low-Wage Workers

One of the requirements for eligibility when applying for a personal loan is that you have a steady source of Income from a profession, job, or business. If your income is below the minimum or fluctuates, your chances of acquiring a personal loan can be reduced.

3. Incomplete Information in the Application

It will be impossible to create the relevant information about you if your name, address, phone number, or other account information is incorrect. Banks will not approve your loan unless you have all the necessary information.

4. Job Insecurity

When it comes to supplying you with a loan, financial stability is essential. If you change jobs frequently or undertake volatile freelancing work, your loan application will likely be rejected.

5. There are too many Pending Loans

Banks can access your financial profile even if you have taken out loans from third-party lenders. That is why you should only take out loans when required and make sure that you pay your instalments on time. Your chances of securing a personal loan drop if you have many outstanding loans with banks and NBFCs.

6. Other Factors

Other than income and credit score, age, nationality, and even educational qualifications determine eligibility for personal loans. Due to these factors, banks could be hesitant to approve your loan application.

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Business Loan Rejection Reasons

The Prime Minister Employment Generation Programme (PMEGP) refers to a credit-linked subsidy scheme endorsed by the Indian government. Beneficiaries might get a government subsidy of 15% -35% of the project cost under this programme. Apart from that, there are several other types of Business loans that you can apply for, including the loans from the Ministry of Micro, Small and Medium Enterprises (MSME). However, there are also several reasons for the rejection of PMEGP loan applications and others. If you are looking for the MSME loan rejection reasons, here are a few common reasons:

1. Credit Score Issues

Your firm's credit score represents its creditworthiness. A Good Credit score indicates prudent financial management, debt management, and cost-cutting. A poor credit score means a lack of financial prudence and planning on the part of the organisation. A good credit score is above 700, and below 700 it is bad.

2. Cash Flow Issues

A company's cash flow analysis demonstrates its ability to repay the loan after adjusting for operating expenses. A lack of cash flow could sabotage a firm's lender confidence.

3. Heavy Debt Usage

Potential lenders may turn off if a company has multiple debts. A lender's primary concern is the company's ability to repay the loan. It could be a disaster warning if a lender finds that the company is severely in debt.

4. Business is New

Before approving a business loan, creditors often look at the company's historical performance and Market presence. If you have a new business plan, there surely are trust concerns for the investors and lenders as to whether you would be able to repay them or not.

5. Failure to Create a Thorough Company Strategy

Creating and developing a detailed business plan is crucial. The company must thoroughly examine all relevant market situations before submitting appropriate documents for a business loan application.

6. Absence of Collateral

Investors look for physical security when Investing in a business. Thus, before you apply for a loan, a company must have a clear image of its available inventory of assets that can be utilised as Collateral. Mortgaging personal assets is a fantastic technique to secure cash for firms that cannot give realistic assets.

7. Purpose Clarity Deficiency

Businesses that are unclear about the objective of the loan are less likely to be successful in obtaining one. The business must answer questions such as:

  • Why is a loan needed?
  • Will the money be utilised to purchase vital equipment?
  • Is the company introducing a new product?
  • Is it upgrading the office?

8. Business Risk

Major economic issues such as Inflation, fuel prices, etc., play a significant effect on decision-making and investor confidence. For instance, a company looking to grow its transportation sector may find it difficult to persuade investors of its viability while coping with rising fuel prices. As a result, a company must stay informed about the vital micro and macroeconomic issues that affect its operations and seize chances when they arise.

Home Loan Rejection Reasons

Here are the top reasons for the rejection of home loans:

1. Age of the Borrower at the Time of the Application

When a borrower applies for a Home Loan, there are two main reasons why their application would be rejected: if they're newly employed or if they're nearing retirement age. Lenders are often unwilling to approve loans for such people because they can't adequately assess the borrower's repayment capacity. While a newcomer typically has a lesser salary, someone approaching retirement may not be able to repay the loan as their sources of income dwindle.

2. Unstable Employment

As previously stated, home loans are often for long periods. It entails a long-term commitment. Regular job changes and spells of unemployment might impact your home loan eligibility. For your home loan to be accepted, you must have been employed at your present job for a minimum of three years. If you have been employed for a more extended period, the lender has the assurance that you are capable of repaying the loan within the specified period.

3. Low Credit Scores

Lenders today request your Credit Report even before you apply for a loan, regardless of the loan you intend to take. With the help of your credit score, lenders can check your credit history and worthiness. For your loan to be evaluated, you must have a credit score of at least 750 points. The credit score will suffer if you do not pay your credit card payments or your existing loan EMIs. These characteristics alert the lender that your credit repayment history is less than perfect.

4. Low Loan-to-Income Ratio

You must advise your lender of any other loans you have taken, such as a car loan, a motorcycle loan, a personal loan, etc. This aids the lender in determining your loan-to-income ratio.

You should not borrow more than 50% of your monthly income in total loans, including the home loan granted. If your loan-to-income ratio is more significant than half of your monthly salary, lenders are likely to reject your application. However, you can also apply for a loan as a joint loan and have it accepted by including your family income (income from your husband and children).

Add together all of your monthly loan payments and divide them by the gross monthly income (total money amount earned before all the deductions) to get your loan-to-income ratio.

Your monthly debt payments would be Rs. 2,000 if you paid Rs. 1500 a month for your mortgage, Rs. 100 a month for an auto loan, and Rs. 400 a month for the rest of your loans. (Rs. 1500 plus Rs. 100 plus Rs. 400 equals Rs. 2,000.) Your debt-to-income ratio is 33% if your gross monthly income is Rs. 6,000. (Rs. 2,000 equals 33% of Rs. 6,000)

5. Failing to File Income Tax Returns

It is critical to file your Income Tax Returns yearly, as this could be a significant Factor for a home loan refusal. Even if your employer does not offer Form-16, you must file your Taxes. Before approving your house loan, lenders look over your tax filing data for the previous three years.

6. Incomplete Documentation

Your home loan can get refused if you Fail to provide accurate documentation during the approval procedure. You have to submit all required documents listed on the application form. Also, make sure you don't give any fake information, which could lower your acceptance rate.

7. Unapproved Property

Lenders frequently check to see if local authorities have approved the financed property. The loan may be refused if the property is not authorised or does not follow the municipal authorities' specific rules. Furthermore, because older houses often do not have significant resale value, lenders are sometimes unwilling to give loans for their purchases.

8. The Lender does not approve the Builder

You may have an approved property, but the property's builder is not approved by your lender. In such cases, home loan denials are prevalent. Thus, before you apply for any loan, you should check with the lender to see if they have a list of approved builders.

9. Previously Refused Loan Applications

As previously stated, banks will request your credit report, which contains a detailed record of your previous loan applications, including those denied. As a result, knowing your findings from one bank before applying for a loan from another is preferable. This will assist you in correcting your errors and ensuring that you do not make the same blunders when applying for the loan a second time.

10. Serving as a Guarantee for a Defaulter

Serving as a guarantor for a loan defaulter is another ground for a home loan refusal. You should exercise extreme caution before agreeing to be a guarantor for anyone, as it might be harmful to you, especially if you require a loan. Before becoming a guarantor, you must be confident in the borrower's ability to repay the loan. Signing up to be a guarantor for unknown people is a bad idea. If the borrower defaults on the loan, you are not only held liable and forced to pay the remaining amount on their behalf, but it will also impact your credit history.

What Can You Do?

Here is all that you can do to avoid a loan rejection:

  • Check the required documents before time and be ready with all of them
  • Keep the documents' scanned copies if you're applying for a loan online and the original ones with required photo copies if you are applying offline
  • Ensure your original documents are in good shape
  • Fill out the details on your application form with care and consideration
  • Avoid overwriting, but present all necessary information correctly and without spelling errors
  • Fill in your name and address information exactly as it appears on your KYC documents
  • Before submitting your loan application, double-check the information you supply


If your loan application is denied once, it will be reported on your credit report, making it tougher for you to borrow money in the future. It's best to keep the abovementioned considerations in mind and apply when you're confident that your loan application will not be denied. If you believe you lack any of the parameters, you should first improve before applying.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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