8 Reasons Why Banks Reject Personal Loan Applications

Why Banks Reject Loan

Discover the top reasons why banks reject personal loan applications. Learn about common pitfalls and how to improve your chances of loan approval.

Getting a personal loan can frequently feel like going through a network of strict requirements and financial terms. Applicants prepare themselves with a strong credit history and supporting documentation, but its the smaller details that result in loan rejections catch them off guard. The goal of this post is to shed light on the perplexing subject of loan approvals. We’ll examine the less evident but equally important factors that lead banks to reject loan applications.

Top Reasons Why Banks Reject Personal Loan

  1. Low on the credit score
    Having a low credit score might frequently be the obstacle that prevents one from getting a personal loan. It functions as a numerical overview of your creditworthiness, which is carefully examined by lenders. This score is calculated based on your history with credit and debt management. It is heavily influenced by variables including several open accounts, high credit utilization, and late payments.

    On the way to a higher credit score requires the use of responsible financial practices. It is essential to pay bills on time and your current loan’s Equated Monthly Installments (EMIs). It conveys to lenders your dependability and responsibility. Additionally, maintaining credit card balances well below credit limit indicates that you are a competent credit manager. Credit utilization is the term for this, and lower percentages are better for your credit score.

    It’s also necessary to regularly monitor your credit report. It lets you identify and correct any errors that could unjustly lower your score. Lenders often view a credit score of 750 or higher as indicative of a solid financial condition. Your chances of getting approved for a loan are increased when you reach and keep such a score, and you might even get better terms. Recall that your credit score is a representation of your financial history rather than just a number. If you compose it correctly, you can get the amount of money you require.
  2. Multiple Loan application
    When it comes to securing personal loans, the strategy of “more is better” does not apply. In fact, submitting multiple loan applications in a short span of time can be a red flag for lenders. This is because each loan application typically triggers a hard inquiry into your credit report. Such inquiries are noted, and when lenders see several of them, it may suggest that you are in urgent need of funds or worse, shopping around for loans due to being turned down elsewhere.

    Lenders may doubt your ability to repay the loan due to this impression of financial instability or poor management, which could decrease. It’s like casting a wide net in the sea of credit, which might alarm the fish—lenders—causing them to swim away.

    A lot of credit scoring models may treat several queries for the same kind of loan that happen within a 14–45-day period as a single inquiry. By using this strategy, the negative effects on your credit score are reduced and you are seen as a cautious and responsible borrower.
  3. Large existing debt
    When lenders evaluate a personal loan application, one of the key metrics they assess is the debt-to-income (DTI) ratio. This ratio is a measure of your monthly debt payments compared to your gross monthly income.

    It’s expressed as a percentage and provides lenders with a quick snapshot of your financial obligations relative to your income. A high DTI ratio suggests that a significant portion of your income is already earmarked for debt. This can raise concerns about your capacity to take on and manage additional loan repayments.

    If your DTI ratio is high, it’s advisable to focus on reducing your existing debt before applying for a new loan. This can be done by paying off smaller debts, consolidating debts for better terms, or restructuring current debts. Lowering your DTI ratio not only improves your chances of loan approval but may also qualify you for lower interest rates.
  4. Not meeting the income criteria
    One of the most important qualifying requirements for loan applicants is their income, which is set by lenders like banks or financial organizations. The criteria guarantees that borrowers have the financial capacity to repay the loan and assists lenders in determining the risk involved in making a loan.

    The minimum income requirement varies between lenders and can be influenced by different variables. These variables can be the kind of loan, the applicant’s job status (self-employed or salaried), and occasionally even their location.

    As an example:
    Most lenders have a minimum salary demand of Rs. 15,000 or more per month for professionals who are employed. However, lenders frequently favor those who make at least Rs. 25,000 each year.
    Lenders often need self-employed individuals to have a gross annual income of at least Rs. 2 Lakhs.
  5. Unstable employment history
    An unstable employment record, recognized as multiple job changes or large intervals between jobs, may negatively impact your ability to get a personal loan.

    This is the reason why:
    Although personal loans are unsecured loans, no collateral is needed. As a result, when determining a borrower’s capacity to repay a loan, lenders mainly consider their income and stability of work. Long-term employment stability with one employer shows financial stability and dependability, which are important considerations for lenders when approving loans.
  6. Missing or Incorrect Document
    To process applications for personal loans, financial institutions need a series of documentation. Identity, income, work, and residency documentation are often found in these documents. The exact requirements may differ, but they usually aim to confirm the borrower’s identity, creditworthiness, and ability to repay. Generally, these document s in India can vary. Typically, lenders want to see proof of identity (passports, voter IDs, driver’s licenses, or Aadhaar cards), proof of address (utility bills or passports), proof of income (bank statements, tax returns, or recent salary slips), and current passport-sized photos.
  7. Age and Nationality Restrictions
    Most banks set age ranges (often between 21 and 60 years old) and demand that applicants be citizens or lawful permanent residents of the nation. Rejection of a personal loan may result from falling outside of these age ranges or from failing to meet nationality requirements.
  8. Lack of relationship with bank
    An applicant’s previous transactions with banks might have a big impact on how their loan application is handled. The applicant’s past interactions with the bank are one element considered when a bank reviews a loan application. Consumers who have kept accounts with the bank or made prior transactions with them are often regarded as more dependable and trustworthy.

Advantages of having an established bank relationship:

  • Bank familiarity: Your financial history and conduct are already known to the bank. This may result in quicker approval timeframes and a more seamless verification procedure.
  • Trust: The bank may have more faith in your ability to repay the loan if you have a good banking history, which shows dependability.
  • Better arrangements: Because of the existing relationship, you may be eligible for better loan arrangements, like lower interest rates or larger loan amounts.

Can ZapMoney Make Loan Process a Breeze?

Yes, your best bet for easily obtaining personal loans is ZapMoney, which handles typical reasons for denial like low credit score, high debt-to-income ratios, and problems with income or paperwork.

ZapMoney guarantees a smooth loan application process by providing tools for credit monitoring and improvement. Apart from that, they provide incorporated applications to reduce hard inquiries, customized financing options for different income levels, and minimum documentation work. It also helps you build financial relationships with lenders, even if you have never interacted with the bank before. You may easily handle the intricacies of personal loans with ZapMoney, increasing your chances of acceptance with advantageous conditions.

However, the personal loan application process can often be challenging, with banks considering a variety of factors before approval. Even well-prepared applicants with solid credit histories and complete documentation can face rejection due to less obvious issues.



The ZapMoney app makes personal finance easy, accessible, and affordable. The App is available on Google Play Store and App Store for download, allowing you to sign up and access easy personal loans. ZapMoney is powered by Monexo Fintech Private Limited which is a registered NBFC-P2P.
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