Common Education Loan Rejection Reasons in 2025

Education loans provide financial support to students, enabling them to pursue their academic aspirations. These loans can be secured with collateral, such as property or assets, to reduce the lender's risk. However, there are instances when an education loan with collateral, a bank may decline an education loan application. 

Top 5 Reasons Why Banks Reject Loan Applications with Collateral

One of the most common reasons for loan rejection is due to the inadequacy of collateral. If you think that it is totally unintuitive for a bank to reject your loan request, especially when you provide collateral security - you are not alone... we used to think the same until we dug deeper into collateral-related laws and regulations. Hence, we bring the top education loan rejection reasons.

• Inadequate collateral value
• Unacceptable collateral type
• Poor academic performance 
• Incomplete documentation 
• Low CIBIL score

Read on to find out why a with-collateral loan request might get rejected, and what you can do to increase your chances.

Inadequate Collateral Value

One of the primary reasons a bank might decline an education loan with collateral is if the collateral's value does not meet its minimum requirements. Banks typically have specific guidelines regarding the collateral's worth in relation to the loan amount requested. If the collateral's value falls short of the loan amount, it may not be accepted as security. This situation can be especially problematic for students whose collateral assets may not hold sufficient value.

For example, Rahul, a student of MS in the USA, requires an education loan of INR 60 Lakh. He is willing to pledge his house as collateral. However, when the bank evaluates the value of the collateral, the value comes out to be INR 50 Lakh. In such a case the bank cannot accept that collateral as security thus his loan application will be declined.

Unacceptable Collateral Type

Banks have preferences when it comes to the type of collateral they accept for education loans. Real estate properties like houses and flats are often favored because they are relatively stable in value. Other assets, such as vehicles or jewelry, may not be as readily accepted, or their value may depreciate rapidly. Additionally, some banks may have restrictions on the location of the collateral, limiting their acceptance to specific regions or countries.

Lenders generally DO NOT accept the following immovable properties:

• Agricultural land
• Open land without boundaries
• In Telangana: Notary registered property
• In Karnataka: B Khata property
• In Delhi: GPA or leasehold properties

Poor Academic Performance

Banks reject loan applications of those with poor academic performance. This is because banks determine the employability of the student based on their academic performance among other factors, and therefore, poor academic records essentially imply less employability. This poses a risk factor for the bank as there are higher chances of the student deferring the payment in the future. If your percentage in 10th, 12th or graduation is lower than 40%, then your loan application is likely to be rejected.

Incomplete Documentation

Proper documentation is essential when applying for an education loan with collateral. If any required documents for an education loan are missing, incomplete, or contain inaccuracies, the bank may reject the application. It is essential to ensure that all paperwork, including property titles, appraisals, and income verification, is in order before submitting the loan application.

Did you know that one document due to which loans get rejected quite frequently is the ‘Occupancy Certificate’, also known as ‘Approved Map’ in some parts? It is a document issued by your local municipal authority that ratifies your property’s construction. In case you purchased the property from a builder, then the builder will have this document. In case you have misplaced this document, you can apply to retrieve it from the municipal authorities. This retrieval is usually a time-taking process, around two months at least, so, start early!

Documentation is one of the major steps in securing an education loan. However, students face several hiccups during this step. And that is why GyanDhan provides a customized document checklist for students. To add to it, our doorstep document pickup service helps to accelerate the processing of the application as our Relationship Officers check the documents at your home to see if anything is missing or invalid. So you get the chance to resolve any document-related issues on the spot instead of going to the bank later.

Low CIBIL Score

In addition to collateral, banks often consider the borrower's credit history when making lending decisions. If the applicant has a poor credit history or no credit history at all, it can raise concerns for the bank. Even with collateral, a lack of creditworthiness can result in a loan rejection.

Low CIBIL score is one of the reasons why your education loan application can get rejected because it shows that you have not repaid your previous loans or have delayed the payments. Since banks treat this negatively and anticipate deferment in the future, your loan application may be rejected on this ground.

From inadequate credit history and collateral to incomplete documentation and mismatched loan requirements, there are numerous pitfalls that applicants must navigate. Nevertheless, with proper guidance and support, these challenges can be overcome.

This is where GyanDhan, a leading education financing platform, shines as a beacon of hope. With its vast experience and expertise in the field of education loans, GyanDhan has helped countless students fulfill their dreams of studying abroad. They offer comprehensive assistance, from selecting the right loan scheme to assisting with documentation and providing valuable insights to enhance the chances of loan approval.

In your journey toward higher education, let GyanDhan be your trusted partner, working tirelessly to ensure your education loan application meets success. Don't let common hurdles deter you; instead, rely on GyanDhan to navigate the complex world of education financing and turn your academic aspirations into reality. To start your journey check your loan eligibility

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