Refusal of a car loan? Here’s everything you need to know
A car loan application may be rejected based on your credit history or current financial situation. But by contacting your lender and improving your finances, you can work on creating an application that won’t be turned down in the future.
Why have I been refused a car loan?
Lenders frequently reject applicants based on their credit score, credit history, and overall debt load.
- Errors in the application. You can be denied a loan because of simple errors in the application. If you miss a section or write down incorrect information, lenders may reject you without giving you the opportunity to update the incorrect details.
- Bad credit rating. 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 immediately denied.
- Limited credit history. If you have a limited or no credit history, lenders will not be able to assess your ability to make future car loan payments. They may use this as a reason to decline your application.
- Big debt. If you have a lot of debt from other loans or credit cards, your DTI ratio – or debt to income ratio – will be higher. A DTI ratio of 50% or greater is considered a red flag and may result in rejection.
What to do if you were refused a car loan
A rejection is not the end of the world. Take a few steps before reapplying to increase your chances of being approved.
Contact the lender
Contact the lender. Find out why your application was denied – lenders are required to tell you the specific reasons. If it is not sent automatically, request it within 60 days of your request, otherwise it will not fall under the Equal Credit Opportunity Act.
If it was something as simple as an application error, you can make adjustments and reapply. If it’s your credit score or other debts, you can work on improving them before reapplying.
Improve credit score
Your credit score is one of the main factors that lenders consider when applying. Take the time to improve your credit score by checking your credit report, paying off your debts on time and reducing your rate of credit utilization.
It will take a few months. If you’re in a hurry, consider other options while you work on your score. But once you’ve established a strong recent repayment history, lenders will see you as less risky.
Minimize your debt
Reducing your debt is key to attracting future lenders. Not only should you focus on paying off your current debts, but avoid taking out new loans or credit cards.
Review your budget and try to remove any unnecessary expenses before reapplying. Debt Consolidation is also a great way to minimize your debt-to-equity ratio (DTI), which lenders use to determine if you have enough money to comfortably afford another loan repayment.
Look for low credit lenders
There are lenders who accept bad credit. It could be a way to get you behind the wheel sooner rather than later.
These lenders specifically cater to drivers with low credit scores. However, compare options carefully – these lenders tend to offer much higher interest rates that could cost you thousands of dollars in the long run.
The options don’t end with your ability to quickly improve your credit and reduce your debt, although both can certainly help.
Resellers “Buy here, pay here”
A BHPH dealership isn’t perfect, but it can be a good option if you have a low credit score and are desperate for a vehicle.
BHPH dealerships sell and finance vehicles on their lots. Credit approval standards tend to be lower and the process is much faster than traditional loans. But the interest rates are very high and there are fewer vehicles available.
Co-signed car loan
A co-signed auto loan is when you still bear full responsibility for the monthly payments but someone else is backing your loan. As with a joint auto loan, your credit history and the credit history of your co-signer will be considered during the application process. It increases your chances of approval and can mean more favorable interest rates and terms.
Solidarity 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 consider both income and credit scores when making an approval decision. A joint application may also result in a lower interest rate and the possibility of taking out a larger loan due to the additional income.
The bottom line
If you have been refused, take a step back. Your lender must provide a letter stating why you were rejected.
And as with everything in finance, preparation is key. The next time you apply, do your research, monitor your credit score, and reduce your total debt. This will help ensure your application is the best it can be when you submit it to a lender.