Receiving a car loan rejection can be difficult, especially because for many drivers, a loan is the only practical way to get behind the wheel. If this is you, now is the time to figure out why it happened and take the necessary steps to avoid it in the future.
Why have I been refused a car loan?
There are many factors that affect your potential to receive an auto loan.
- Bad credit rating. Most lenders have a minimum credit score as part of their eligibility criteria for obtaining a loan. If your credit score is below this requirement, you will be immediately denied. A score of 620 or less is less than ideal when it comes to getting a loan.
- No credit history. If you don’t have accumulated credit, lenders won’t be able to assess your ability to make future auto loan payments and may use that as a reason to deny your application.
- Errors in the application. You can be denied a loan due to simple errors in the application itself. If you miss a section or write down incorrect information, lenders may reject your application.
- 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 higher is considered a red flag.
What to do if you were refused a car loan
Just because you’ve been denied a car loan doesn’t mean you’re out of the question to get one in the future. Take a few steps before reapplying to increase your chances of being able to leave the field with your new vehicle.
Contact the lender
The first step after being refused an auto loan is to contact the lender. Find out the specific reason why your request was denied. If it was something as simple as an application error, you can easily make adjustments and reapply. It is important that you request this information within 60 days of your request, otherwise it will not fall under the Equal Credit Opportunity Act.
Improve credit score
As mentioned earlier, your credit score is a critical metric for lenders when determining whether to accept or deny your application. Take the time to improve your credit score by checking your credit report, paying on time and reducing your credit utilization rate before reapplying for a car loan after a denial.
Look for low credit lenders
If the reason for your denial was due to a poor credit rating, a bad credit lender could be a way to get you behind the wheel sooner rather than later. These lenders specifically cater to drivers with low credit scores. But it’s important to compare options because these lenders tend to offer much higher interest rates that could cost you thousands of dollars in the long run.
Minimize your debt
Reducing your debt is key to attracting future lenders. First, it is important to avoid accumulating future debt by trying to reduce it. It is recommended that you take the time to review your budget and try to remove any unnecessary expenses before reapplying. Debt consolidation is also a great way to minimize your debt.
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 can be a good option if you have a low credit score and are desperate for a vehicle. In this scenario, the dealer both sells and finances the vehicles on his lot. Credit approval standards tend to be lower and the process is much faster than traditional loans. But it is important to consider that interest rates are very high and there are fewer vehicles available.
Co-signed car loan
A co-signed auto loan, on the other hand, is when you – the borrower – still bear full responsibility for vehicle payments, except in the event that you cannot. Your credit history and your co-signer’s credit history will be considered during the application process, which may lead to approval and more. favorable interest rates and terms.
Solidarity car loans
A joint auto loan is when you and another person – usually a life partner or spouse – share the entire auto loan. This can lead to a lower interest rate as well as the ability to take out a larger loan due to the additional income.
The bottom line
Don’t get discouraged after an initial refusal from an auto lender, but instead take a step back and try to find out the reason for the refusal. As with everything in finance, preparation is key. When you next apply, follow the steps above to ensure your application will look perfect to the potential lender.