Top Mistakes That Can Get Your Personal Loan Application Rejected in 2025

Have you ever wondered why your loan application was rejected even though you have a steady income and no major financial issues? It’s a common and frustrating experience. Often, the reason lies in small but essential details that are easily overlooked.

Imagine applying for a personal loan of ₹5,00,000. You meet all the eligibility criteria, but the bank still rejects your application. On closer inspection, you found out the rejection was due to missing proof of income or errors in your financial documents. 

A small mistake like this can cost you the loan, leaving you confused and disappointed.

Personal loans are becoming very popular in India. According to the Fintech Association for Consumer Empowerment (FACE), digital lenders disbursed 3 crore loans worth ₹37,000 crore in just one quarter of 2024, a 19% increase compared to last year. With rising competition, securing approval isn’t as easy as it seems.

For example, if you’re eligible for a ₹5,00,000 loan at 12% interest for 3 years, your EMI would be ₹16,607. But a rejection could force you to depend on high-interest credit cards, pushing your monthly payments to ₹25,000 due to 36% interest rates.

Understanding the common reasons behind rejections can improve your chances of loan approval.

Read More - Increase Your Loan Approval Chances

Mistakes in Financial Documentation

When applying for a personal loan, accurate financial documentation is crucial. Missing or incorrect information can lead to delays or rejections. Lenders rely on these documents to verify your financial stability and repayment ability. 

Ensuring all forms are complete, consistent, and up-to-date increases your chances of approval.

1. Incomplete or Incorrect Information

One of the most common reasons for loan rejection is incomplete or incorrect information. While this mistake might seem trivial, it can significantly impact your application. 

Lenders must verify all the details you provide, from personal information to financial data. Missing details such as your full name and address, or even incorrect figures related to your income and expenses can result in an automatic rejection.

For example, if you incorrectly state your monthly income as ₹30,000 instead of ₹50,000, this discrepancy will raise doubts about the accuracy of the rest of your information. 

Similarly, not filling in the correct loan amount you’re applying for or forgetting to mention your employer’s details can prevent your application from progressing.

It’s essential to double-check all forms before submission. A few minutes spent reviewing your application can save you hours of frustration later.

2. Lack of Income Proof

Another common mistake is failing to provide adequate proof of income. Lenders want to ensure you have a stable income to repay the loan on time. Without this verification, your application will likely be rejected.

Lenders generally ask for the following as proof of income:

• Pay stubs: These are the most common proof for salaried individuals. It helps lenders understand your regular income.
• Bank statements: These can be secondary proof of income.
• Income tax returns: These documents show your financial health over a few years, especially for self-employed individuals.

Let’s say you earn ₹75,000 per month but don’t provide your pay stubs with the application. Without this document, the lender may question your ability to repay the loan, leading to rejection.

As shown above, failing to submit proper income proof can lead to rejection, pushing you toward high-interest options like credit card debt. Thus, it highly increases your financial burden.

3. Not Providing Proof of Existing Debts

Many people mistakenly think that hiding their existing debts increases their chances of loan approval. However, failing to disclose your current financial obligations can lead to severe consequences. Lenders typically look at your Debt-to-Income (DTI) ratio to understand how much of your monthly income goes toward paying off existing debts.

Let’s consider an example: 

If you already have an EMI of ₹20,000 on a car loan and ₹10,000 on a credit card, failing to disclose this debt will lead to rejection. Lenders can easily spot inconsistencies and may assume you’re trying to hide something, which reduces your chances of securing a loan.

Transparency is crucial. Always disclose all your debts honestly, and be prepared to show proof of how much you owe.

4. Failure to Update Contact Information

You might be surprised by how many loan rejections happen simply because of outdated contact details. Whether it’s an old address or an incorrect phone number, this small error can lead to more significant issues.

For instance, if you apply for a loan but forget to update your address or change your phone number, the lender might face difficulty reaching you. As a result, they might reject the application or request further verification, which could delay the approval process.

Ensure that all your contact information is current before submitting your loan application. This ensures the lender can easily communicate with you regarding the loan status or any follow-up questions.

5. Missing Required Documentation

Finally, missing required documentation is another key reason for loan rejection. Each lender may have slightly different requirements, but several core documents are almost always required for a personal loan application. These include:

For example, if you forget to provide your PAN card or miss submitting your utility bill for address proof, your loan application will be delayed or rejected.

Make sure to prepare all the required documents ahead of time and double-check your application to ensure everything is in order.

Also Read –  Why Your Personal Loan Application Gets Rejected

Mistakes Related to Credit and Financial Health

When applying for a personal loan, your credit history and score greatly influence the lender’s decision-making process. Lenders assess your creditworthiness to determine if you are a reliable borrower capable of repaying the loan. 

Unfortunately, several credit-related mistakes can negatively impact your application, reducing your chances of approval or resulting in higher interest rates.

Understanding these common credit-related mistakes is key to improving your loan approval chances. Let’s explore each of these issues in more detail.

1. Low Credit Score

A low credit score is one of the most well-known factors that can lead to personal loan rejection. Your credit score reflects your financial habits and how well you manage credit. Lenders use this score to gauge your risk level.

A score below 650 can lower your chances of getting loan approval. For example, if your score is 600, lenders might view you as a high-risk borrower. This could result in a rejection or a much higher interest rate loan.

If your score is low, improving it before applying for a loan is essential. You can do this by paying off outstanding debts, reducing your credit card utilisation, and ensuring no missed payments.

2. High Credit Utilisation

Credit utilisation refers to the amount of credit you use compared to your credit limit. Using a high percentage of your available credit (over 30%) signals to lenders that you’re overburdened with debt. This increases your chances of rejection.

Let’s say you have a ₹1,00,000 credit limit on your card, but your balance is ₹80,000. This is considered high credit utilisation. Lenders may view this as risky, suggesting that you’re relying too much on credit.

Example

Reduce your credit card debt before applying for a loan. Aim to keep your credit utilisation below 30% of your total credit limit.

3. Too Many Recent Credit Inquiries

Each time you apply for a credit card, loan, or other financial products, a "hard inquiry" or "hard pull" is made on your credit report. 

• A hard inquiry is when a lender reviews your credit report to assess your financial behaviour before approving your application. 
• While a single inquiry might have a small impact, too many inquiries within a short period can lower your credit score and signal financial instability.

Lenders see multiple inquiries as a warning sign. They may interpret it as you desperately seeking credit or struggling to manage your finances. 

This can increase the risk of loan rejection or higher interest rates because lenders might assume you're in financial trouble or unable to handle new debt.

Example: 

If you apply for two personal loans and three credit cards within a few months, your credit report will show five hard inquiries. This is considered a high number of inquiries and can negatively affect your credit score. 

As a result, your chances of securing a personal loan may be significantly reduced, as lenders might see this behaviour as risky.

Here are a few things to keep in mind regarding recent credit inquiries:

• Multiple inquiries in a short time can reduce your credit score.
• Frequent credit applications suggest financial desperation, which raises a red flag for lenders.
• Spacing out applications helps maintain a stable credit score and shows financial responsibility.

Tips for Managing Credit Inquiries

By being mindful of credit inquiries, you can avoid damaging your credit score and increase your chances of getting approved for future loans.

4. Previous Loan Defaults

If you’ve defaulted on loans in the past, lenders are likely to view you as a high-risk borrower. Loan defaults, missed payments, and bankruptcies are major red flags.

Suppose you had a car loan with an EMI of ₹10,000 per month and missed six consecutive payments two years ago. This ₹60,000 overdue amount will appear on your credit report and negatively impact your credit score. 

Even if a lender approves your loan, they might charge a higher interest rate, say 18%, instead of 12%, increasing your overall repayment burden.

If you have a history of loan defaults, work on repairing your credit score before applying for another loan. You can also approach lenders specialising in loans for individuals with a history of defaults.

5. Lack of Credit History

While a low credit score is a problem, having no credit history can prevent you from securing a personal loan. Lenders find it difficult to assess the risk of lending to someone who has never taken out a loan or used a credit card.

For example, if you’re a 24-year-old with no prior loans or credit card usage, lenders won’t have any repayment data to assess your creditworthiness. As a result, your loan request for ₹2,00,000 might be rejected. 

Instead, starting with a secured credit card of ₹20,000 or a small consumer loan can help build your credit history and improve future loan approval chances.

Conclusion

Personal loan rejections are frustrating, but avoiding the common mistakes outlined in this blog can significantly improve your chances of approval. Whether it’s ensuring that your financial documentation is in order, maintaining a healthy credit score, or providing accurate information, attention to detail is key.

So, before applying for a personal loan, ask yourself: Are you making any of these mistakes? Remember, one small mistake could be the reason for rejection, but avoiding them will put you on the path to loan approval.

FAQs

1. How can I improve my chances of getting a personal loan in India?

Ensure all financial documents are accurate, maintain a healthy credit score, and disclose all existing debts.

2. What income proof do I need for a personal loan?

Pay stubs, bank statements, and income tax returns are typically required.

3. How does my credit score affect my loan approval?

A higher credit score increases your chances of loan approval and reduces interest rates.

4. Can I get a personal loan with a low credit score?

It’s possible, but your loan might come with a higher interest rate or you may need a co-signer.

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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?