A car loan application may be denied based on your credit history or current financial situation. But by reaching out to your lender and improving your finances, you can work towards creating an application that won’t be denied in the future.
Why was I denied a car loan?
Lenders often turn down applicants based on creditworthiness, credit history, and overall debt.
- Application error. You can be denied a loan simply because of simple errors in the application. If you miss a section or write down information incorrectly, lenders can reject you without giving you an opportunity to update inaccurate details.
- Bad credit. Most lenders have a minimum credit score as part of their eligibility criteria. In general, lenders want to see fair credit—a score of 620 or higher. If your credit score is below this requirement, you will be rejected immediately.
- Limited credit history. If you have limited or no credit history, lenders cannot assess your ability to make future auto loan payments. You can use this as a reason to reject your application.
- Big Debt. If you have a lot of debt from other loans or credit cards, your DTI ratio is – or debt-to-income ratio – will be higher. A DTI percentage of 50 percent or more is considered a red flag and can lead to rejection.
What to do if you were denied a car loan?
Cancellation is not the end of the world. Take a few steps before reapplying to increase your chances of getting approved.
Contact the lender. Find out the reason why your application was denied – lenders need to tell you the exact reasons. If it is not sent automatically, request it within 60 days of your application, otherwise it does not fall under the Equal Credit Opportunity Act.
If it’s something as simple as an application error, you can make adjustments and reapply. If your credit history or other debts are at stake, you can work on improving them before reapplying.
Improve credit score
Your credit rating is one of the most important factors that lenders consider when you apply. Take your time improve your credit score by checking your credit report, paying off your debt on time, and lowering your credit utilization.
This will take a few months. If you’re in a hurry, consider other options while you work on your score. But once you’ve built a solid repayment history, lenders will see you as less risky.
Minimize your debt
Lowering your debt is key to attracting future lenders. You shouldn’t just focus on paying off your current debts, but avoid taking out new loans or credit cards.
Check your budget and try to cut unnecessary expenses before reapplying. debt consolidation is also a great way to minimize your debt-to-income (DTI) ratio, which lenders use to determine if you have enough money to comfortably afford a new loan payment.
Look for bad lenders
There are lenders who accept bad credit. This could be a way of getting you behind the wheel sooner rather than later.
These lenders specifically market drivers with low credit scores. Compare options carefully though – these lenders usually have much higher interest rates that could cost you thousands in the long run.
Options don’t stop at your ability to quickly improve your credit score and lower your debt — although both can certainly help.
Buy Here, Pay Here merchants
A BHPH dealer isn’t perfect, but it can be a good option if you have a low credit score and are desperate for a vehicle.
The BHPH dealers sell and finance the vehicles on their properties. Loan approval standards are typically lower, and the process is much faster than traditional lending. But interest rates are very high and fewer vehicles are available.
Co-signed car loan
With a co-signed car loan, you still have full responsibility for making monthly payments, but you have someone else to support your loan. As with a shared car loan, both your credit history and the credit history of your co-signer are taken into account during the application process. This increases your chance of approval and can mean more favorable interest rates and terms.
Common car loans
A joint car loan is when you and someone else – usually a partner or spouse – share equal responsibility for a car loan. The lender will take both into account income and credit scores when an approval decision is made. Applying together can also result in a lower interest rate and the opportunity to take out a larger loan due to the additional income.
The final result
If you’re rejected, take a step back. Your lender should provide a letter explaining why you were denied.
And as with anything in finance, preparedness is key. Next time you apply, do your research, keep an eye on your credit score, and lower your overall debt. This will help ensure your application is as good as it can be when you submit it to a lender.