Find out why you might’ve been rejected and how to improve your chances of approval.
Since applications show up on your credit report as an inquiry, try and improve your chances of success before you apply again. This means understanding why lenders reject applications and knowing what you should do if it happens to you.
Why are car loans rejected, and what can I do about it?
If your loan is rejected, the first thing to do is to make sure you have completed the application correctly and that it wasn’t turned down on a technicality. Doublecheck that you:
- Filled out every section of the application completely and accurately.
- Provided sufficient details for your income, identity, employment and loan purpose.
- Met or exceeded the minimum eligibility requirements.
If your loan application was completed correctly and still turned down, it was probably because the lender found red flags in one or more of the criteria. Lenders look things like credit history, employment and other debt to determine if you’re a high-risk applicant.
Your credit history
Your credit history is a strong indication of how likely you are to pay back or default on a loan. It includes details like past bankruptcies, outstanding debts, overdue accounts and previous credit inquiries. A higher credit score means a lower risk for lenders. Check your credit score before applying for a car loan to see your risk.
Current income and employment history
Your income and employment is one of the main factors lenders consider when approving your loan. If you’re not earning enough, only just started a new job or have an unstable employment situation, you’re more likely to be considered high risk.
If income is an issue, applying for a used car loan likely gives you a higher chance of success. If you’re self-employed and can’t provide all the relevant income documents, consider applying with a cosigner. These may also be an effective option for borrowers who don’t want to provide full income and employment details for an application.
Other loans or outstanding debt
If you’re paying back other loans or have lots of debt then you’re likely a higher-risk applicant. Debt consolidation might be a sensible step to consider. This involves combining several smaller debts into one large debt, simplifying payments and maybe even getting a better rate. Setting up a single monthly payment comes with its own costs, so make sure you look into these before making your final decision.
Are you a high-risk applicant?If you’re having trouble getting a car loan because you’re a high-risk applicant, consider these two options:
- Secured car loans: A secured car loan involves using your vehicle as collateral, which increases the risk for you and decreases the risk for lenders. You may be eligible for better rates than with an unsecured car loan.
- Personal loans: Taking out a personal loan to purchase a car is another option. There are a variety of personal loans available, and many are easier to qualify for.
How can I avoid being rejected for a car loan?
The key to avoiding rejection is meeting the lender’s requirements before you apply. If your application is declined, ask the lender the reason. They can inform you of any weak points in your application that you might have missed, and you can take the appropriate steps to resolve these for next time.
Also, if there are any inflexible eligibility requirements, such as a minimum income or documentation that needs to be submitted, it’s important that you meet these before you apply. Otherwise, you’re almost guaranteed a rejection.
- Check the credit requirements. Lenders will sometimes require that you have good credit, which usually means having no negative listings on your file. Check your credit report before applying and make sure it meets the lender’s criteria.
- Check the income and employment requirements. If you’re unable to meet the specific income or employment requirements, find a different lender that isn’t as strict.
- Pay off any outstanding loans. It’s a good idea to pay off your debts before taking on more. You’re more likely to have a loan approved if you can prove that you’re able to repay the money you borrow.
What do I do if my car loan is rejected?
If your car loan application is rejected, there are three simple steps to take before you apply again:
- Ask why. Lenders typically explain why your loan was declined if you ask. This can give you an idea of what to do differently next time, and whether the issue is a problem with your finances or the lenders strict requirements.
- Approach without applying. Before making a formal application, contact the customer service team at the lender you’re considering. Get a sense of loan requirements, ask questions and try to find out whether or not your application will succeed.
- Be prepared for next time. Next time, be ready. Make sure you’ve gathered all the information you need and ensure that your application is well-suited to the terms and conditions of that lender.
Ready to apply? Car loan options to consider
A loan rejection isn’t the end of the world. It gives you a chance to figure out what you’ve done wrong and improve for next time. Take some time to compare your auto loan options so you can tackle your next application with confidence.