If your application for a car loan was denied, it’s likely you applied for more than you could afford or your credit score is not high enough. But that’s not the only reason car loans are rejected. Take this as an opportunity to go through your financial history and see where it can be strengthened.
You can typically find out why your car loan application was denied by contacting your lender. If you applied online, you can often find out simple by logging into your account. Otherwise, reach out to customer service over the phone to find out how to get this information.
Common reasons lenders deny car loan applications
There are several reasons why your car loan application might have been rejected. Let’s take a look at the most common.
1. Simple mistakes
You might be surprised how many car loan applications are rejected on a technicality. You might have been rejected because you didn’t:
Filled out all required sections.
Provided sufficient details for your income, identity, employment and loan purpose.
Proofread your answers.
How to avoid it
Read over your application before you submit it to your lender. Consider having someone else take a look — they might notice mistakes you missed.
2. 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.
How to avoid it
Check your credit score and know your lender’s credit requirements before applying. If it’s too low to qualify, consider taking steps to improve your credit first.
3. 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. Even with stable income, you won’t get approved if you apply for a loan you can’t comfortably repay on your income.
How to avoid it
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. Or, freelancers might try to get a steady part-time gig on the books to show you have at least a reliable base income.
4. Other loans
Lenders like to take a look at your debt-to-income ratio (DTI) in addition to income. If you have a DTI under 43%, you might have a hard time qualifying for a loan. You can use our DTI calculator to make sure yours isn’t over the line.
How to avoid it
Over 43%? You might want to consider consolidating your debt before you apply for another loan. This involves combining several smaller debts into one large debt, simplifying payments and maybe even getting a better rate.
5. Credit card debt
Having a high credit utilization ratio can also get you denied. Having a lot of credit card debt means that you’re using up most of the credit that’s available to you, even if your monthly repayments are low. This can affect your credit score and also hurt your car loan application.
How to avoid it
Take steps to pay off your debts before you take out a car loan, such as creating a budget or debt consolidation.
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.
My car loan was denied after signing all the papers. What gives?
There are a couple scenarios that might have played out to get you denied for a car loan.
You be prequalified, not preapproved
Unlike with other types of loans prequalifying and getting preapproved for a car loan are not the same thing. Prequalified car loans don’t lock in your rate or guarantee approval, since they require an additional credit check and more documentation.
But even a preapproved car loan can be denied if your financial circumstances dramatically change. For example, if you file for bankruptcy you could get denied for that preapproved car loan.
It could be a scam
This could be a sign of a car loan scam, commonly called a “yoyo scam.” With a yo-yo scam, a dealer leads you to believe you’ve been approved for financing and then tells you you’ve been denied. In this case, you’ll likely be told to sign a contract with less favorable terms and conditions or even repossess the car.
Yoyo scams are illegal. If you’re a victim, report the dealership to your local attorney general’s office and the Consumer Financial Protection Bureau. You might also want to consider filing a lawsuit for damages and to cover your attorney’s fees. You can learn more about common scams and how to avoid them by reading our guide.
What should I do if my car loan is denied after I drove home?
Contact your dealership immediately. You might be required to return the car to the dealership or risk having it repossessed.
Consider new financing. You might be able to qualify for financing elsewhere — though inform your dealership to find out what your steps are.
Get legal assistance. If your dealership tries to get you to agree to less-favorable terms, don’t sign any new paperwork and consider contacting a lawyer. This is also a sign of a yo-yo scam.
How can I avoid being denied again?
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.
Having trouble getting approved? Consider these alternatives
If you’re having trouble getting a car loan, 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 some might be easier to qualify for.
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.
Frequently asked questions
Some lenders may have a specific waiting period between loan applications, but for the most part, there is no specified waiting period between loan applications. How long you should wait depends on the reason you were rejected. If you were denied because of bad credit, wait to apply until after you improve your score.
If your application was rejected because your debt-to-income ratio was too high, paying off your debts is a good way to make yourself appear as less of a risk to lenders.
Dealers have stringent criteria when it comes to who they’ll lend to. Your best course of action will be to approach the dealer with an outside source of financing. This cuts out the dealer entirely.
You don’t always have to go to a bank or car dealer to get a loan, especially if you’ve already been rejected. An online lender may be able to finance your loan, and there are always car loan brokers that can connect you with a lender if you’re having trouble comparing your options.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).
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