Denied an auto loan? Here’s everything you need to know
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An auto loan application may be rejected because of your credit history or current financial situation. But by reaching out to your lender and improving your finances, you can work on building an application that won’t be denied in the future.
Why was I denied a car loan?
Lenders frequently reject applicants because of credit score, credit history and overall debt.
Errors in the application
You can be denied a loan due to simple errors in the application. If you miss a section or note information incorrectly, lenders may reject you without giving you the chance to update inaccurate details.
Always review each detail on your application to ensure you have everything correct. You may be able to reapply again, but accuracy the first time around will save you time.
Poor credit score
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 lower than this requirement, you will immediately be denied.
There are auto loan lenders for bad credit. But these will cost more in the long run and may have more fees — like origination fees or prepayment penalties — than standard auto loans.
Limited credit history
If you have limited or no credit history, lenders will not be able to gauge your ability to make future auto loan payments. They may use it as a reason to deny your application. Unfortunately, it will take time to amend this. You will need to take on other, smaller debts to build your credit history before you apply again, or apply with a co-signer.
Large amount of debt
If you have a lot of debt gathered from other loans or credit cards, your DTI ratio — or debt-to-income ratio — will be higher. A DTI ratio of 50 percent or higher is considered a red flag and may lead to rejection. Paying down your debts is the best way to lower your DTI, but if you’re able, a second source of income can also lower your DTI.
What to do if you were denied an auto loan
One rejection isn’t the end of the world. Take a few steps before applying again to boost your chances of being approved.
Contact your lender
Lenders are required to give you the specific reasons your application was denied. If it isn’t automatically sent, request it within 60 days of your application. Otherwise, it will fall outside of the Equal Credit Opportunity Act.
If it was something as simple as an application error, you can make adjustments and reapply. If the reason was your credit score or other debts, you can work on improving them before you apply again.
Improve credit score
Your credit score is one of the main factors lenders consider when you apply. Take the time to improve your credit score by checking your credit report, paying your debts on time and lowering your credit utilization ratio.
This will take a few months. If you’re in a rush, consider other options while you work on your score. But once you’ve built up a solid recent repayment history, lenders will see you as less of a risk.
Minimize your debt
Lowering your debt is key to attracting future lenders. You should focus on paying down your current debts while also avoiding new loans or credit cards.
Review your budget and try to remove any unnecessary expenses before reapplying. Debt consolidation is also an excellent way to minimize your debt-to-income ratio (DTI), which lenders use to determine if you have enough money to comfortably afford a new loan payment.
Look for poor credit lenders
There are lenders that accept poor credit scores. This might be a way to get you behind the wheel sooner rather than later.
These lenders market specifically to drivers with low credit scores. However, compare options carefully — auto loans for bad credit tend to have much higher interest rates that could cost you thousands in the long term.
Your choices don’t depend on your ability to quickly improve your credit and lower your debt — though both can certainly help.
“Buy here pay here” dealers
A BHPH dealership is not perfect, but it can be a good option if you have a low credit score and are desperate for a vehicle.
BHPH dealerships both sell and finance the vehicles on their lots. Approval standards for credit tend to be lower, and the process is much quicker than traditional lending. But interest rates are very high and there are fewer vehicles available.
Joint auto loans
A joint auto loan is when you and someone else — typically a partner or spouse — share equal responsibility for a car loan. The lender will consider both incomes and credit scores when making an approval decision. A joint application can also lead to a lower interest rate and the ability to take on a larger loan because of the added income.
Co-signed auto loan
A co-signed auto loan is when you still carry the full responsibility of the monthly payments but have someone else backing your loan. Like with a joint auto loan, both your credit history and your co-signer’s credit history will be factored in during the application process. This increases your chance of approval and may mean more favorable interest rates and terms.
The bottom line
If you’ve been denied, take a step back. Your lender should provide a letter stating why you were rejected.
As with anything in the realm of finance, preparedness is key. Next time you apply, do your research, keep an eye on your credit score and lower your total debt ahead of time. This will help ensure your application is the best it can be when you submit it to a lender.