3 Legit Reasons Why Your Loan Might Get Cancelled After Approval

Key Takeaways
 

• Loan approval is not final; applications can still be cancelled during final checks.
   
• Loans are cancelled if documents show mismatches or errors.
   
• New borrowings or high credit use can cause a drop in credit score and cancellation.
   
• Job changes or income instability are treated as risks by lenders.
   
• Processing fees are usually not refunded if a loan is cancelled.
   
• Chances of disbursal are improved when documents are accurate, credit is stable, and employment is steady.
   

BONUS: A SIGNIFICANT 44% RISE IN PERSONAL LOAN DEFAULTS WAS REPORTED AMONG BORROWERS WHO TOOK LOANS DURING FY25.

Loan cancellation is the process where an approved loan is withdrawn or stopped by either the lender or the borrower before the funds are fully disbursed.

Let’s understand it with an example of Rajesh who applied for a personal loan of ₹5,00,000 to renovate his home. Initially, his application was approved, and he received a sanction letter. However, after the bank conducted a detailed credit verification, discrepancies in his income documents were found. And then the bank cancelled the loan approval: 

Rajesh was disappointed as he had already paid the processing fee of ₹5,000, which was non-refundable. The bank clearly stated that due to inaccurate documentation, they could not proceed with the loan disbursement. 

Why Your Loan May Get Cancelled Even After Initial Approval

Many borrowers assume that once a loan is approved, the funds are guaranteed. However, lenders often conduct final checks before disbursement. Any red flags during this phase, such as document discrepancies, credit score changes, or job instability, can result in cancellation. Below are three real-world examples that highlight how and why this can happen.

1. Discrepancies in Submitted Documents

After receiving initial approval for a personal loan of ₹4,00,000, Priya was relieved. She planned to use the funds to cover medical expenses. However, during the final verification. 

The bank discovered that her address proof did not match the one on her salary slips. Additionally, her income documents had inconsistencies in monthly figures compared to her bank statements. As a result, the bank cancelled her loan: 
 

Despite having a good credit score, the discrepancies made her application seem unreliable. Priya lost her ₹3,000 processing fee and had to reapply with corrected documents.

This highlights how important it is to ensure all documents are accurate and aligned across proofs before applying for a loan.

2. Drop in Creditworthiness

Arun was thrilled when his car loan of ₹6,50,000 was approved. He received a sanction letter and was awaiting disbursement. However, in the interim, he applied for a credit card and made a large purchase on EMI, which increased his credit utilisation ratio. 

The lender conducted a final credit check and noticed a drop in his credit score from 735 to 668. Seeing this as an increased financial risk, the bank cancelled the loan:
 

Arun was unaware that financial activity post-approval could impact his credit profile. This situation shows why it’s vital to maintain financial stability and avoid new borrowings until your loan is disbursed.

3. Job or Income Instability

Neha applied for a home renovation loan of ₹3,00,000 and received initial approval. While awaiting disbursement, she switched jobs, moving from a permanent role at a reputed firm to a contract-based position at a start-up. During the lender’s final employment verification, this change was flagged as a potential risk. As her new role lacked job security and a consistent income, the bank decided to cancel her loan:
 

Neha was disappointed, especially since she assumed a better opportunity wouldn't affect her loan. This case highlights how any sudden shift in income or employment can raise red flags for lenders, even after approval.

What to Do If Your Approved Loan Is Cancelled?

If your approved loan gets cancelled, don’t panic. First, contact the lender to understand the exact reason for the cancellation—whether it’s due to document discrepancies, a credit score drop, or changes in your employment status. Request clarification in writing, if possible. Once you know the issue, take corrective action. 

For example, update or correct any documents, settle existing debts to improve your credit score, or wait until you’ve completed your employment probation period before reapplying. You may also consider applying with a different lender whose criteria may be more suitable. Lastly, monitor your credit report regularly and maintain consistency in financial behaviour to avoid rejections in the future.

Conclusion

Loan approval is only part of the process. Even small document discrepancies, changes in credit activity, or shifts in employment can lead to cancellations. To avoid disappointment, ensure all submitted documents are accurate, avoid taking on new debt after approval, and maintain stable employment. Being proactive and financially transparent will greatly improve your chances of seeing your approved loan through to disbursal.

FAQ’s

Can a personal loan get cancelled?
Yes, a personal loan can be cancelled if issues are found in documents, credit score, or employment before disbursement.

What is a loan cancellation letter?
It is a formal written request sent to the bank asking for a loan approval or application to be cancelled.

How to cancel a personal loan after disbursement?
A personal loan cannot usually be cancelled after disbursement, but it can be closed early by repaying the full amount.

Are there loan cancellation charges?
Most banks do not allow cancellation after disbursement, but foreclosure or prepayment charges may apply.

What is a loan cancellation application?
It is an application submitted to the lender requesting cancellation of a loan before disbursement.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?