Editor's choice: Carvana
- Most credit types welcome
- 45-day preapproval
- Seven-day guarantee
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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.
There are several reasons why your car loan application might have been rejected. Let’s take a look at the most common.
You might be surprised how many car loan applications are rejected on a technicality. You might have been rejected because you didn’t:
Read over your application before you submit it to your lender. Consider having someone else take a look — they might notice mistakes you missed.
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 and know your lender’s credit requirements before applying. If it’s too low to qualify, consider taking steps to improve your credit first.
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.
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.
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.
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.
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.
Take steps to pay off your debts before you take out a car loan, such as creating a budget or debt consolidation.
If your car loan application is rejected, there are three simple steps to take before you apply again:
There are a couple scenarios that might have played out to get you denied for a car loan.
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.
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.
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.
If you’re having trouble getting a car loan, consider these two options:
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.
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