You’re in the market for a new car but you’ve been denied an auto loan. Now what? Here’s what you need to know about why you may have been denied and what to do to make sure it doesn’t happen again.
Why Do I Keep Getting Denied for Auto Loans?
Unfortunately, there are many reasons a bank might reject your application for a car loan. If your loan application has recently been denied or you keep getting denied, it might be due to one of these common reasons:
Application errors. Sometimes, the application could be rejected because of an error you made when filling it out. A missed section, some incorrect information, a missing form or another mistake can mean your loan is ultimately denied.
Bad credit. Bad credit is a common reason for auto loan denial. A score below 670 is usually considered a bad credit score, and this damages lenders’ trust in your ability to pay off a loan.
Too much debt. A high debt-to-income ratio can make lenders leery. If you have a number of loans or credit cards with large amounts of debt, this raises your DTI and may lower your chance of getting approved for future loans, car loans included.
No credit. Lenders look for proof of consistency in paying off past loans when reviewing your application. If you have no credit history, lenders may feel they don’t have enough information about your ability to pay off a future loan.
What Can I Do If My Loan Application Is Denied?
You have a few options when you’ve been denied an auto loan, depending on the reason you were rejected.
If you were rejected because of an application error on your part, you should contact the bank as soon as you can. Hopefully, the mix-up can be resolved and your request will be approved. If not, the lender will tell you when you can reapply.
If you were rejected because of poor credit, check your credit report so you can determine what is negatively impacting your score. Depending on what your report says, look into ways to improve your credit so you can be approved next time. Pay your bills on time, and use your credit cards to make and then repay smaller purchases. Keep in mind that building or rebuilding your credit can take a while. Don’t be disappointed if it takes months or even a year or two to really get your score where you want it.
If you need a loan sooner, consider adding a cosigner to your application that can be your backup if you fail to pay the loan. Lenders feel more comfortable with this method, and it’s a good way to prove dependability.
If you were rejected because you already have too much debt, it’s important to reduce that amount in steady increments. Set a budget and stick to it, tackling the largest debts first. Avoid adding any debt to what you already have. Examine your credit card usage for any unnecessary expenses and cut back on those in the future.
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Does Getting Denied a Loan Hurt My Credit?
Getting denied for an auto loan doesn’t in itself hurt your credit score. The lender didn’t extend anything, so there’s nothing that can hurt your score. However, multiple denied applications at once could hurt your score.
A bank conducts a “hard inquiry” when you apply for a loan. This can cause a drop in your credit score slightly—about five to ten points—whether you’re accepted or not. If you apply for too many loans, numerous hard inquiries on your credit can cause a larger drop.
What Are My Other Options?
If you don’t have time to build or rebuild your credit, can’t get a co-signer, and need a car fast, there are two options to be considered as a last resort.
“Buy Here Pay Here” Dealers
Stop by your neighborhood “Buy Here Pay Here” (BHPH) auto dealer, and one way or another, it will probably get you into a car. It won’t be a new car, and it will probably have lots of miles on it, but at least you’ll get a car you desperately need to get you to and fro.
The BHPH dealer won’t want to talk to you about interest rates. Your local BHPH will focus on your expected monthly payment and ask for a really big down payment. They mostly care about whether or not you have a current, steady income. Based on that, they’ll determine how much they are willing to lend and which car options are available to you. It’s not a great way to buy a car, but for millions of Americans, it is the only way they can make this significant a purchase.
Unfortunately, purchasing a car at a BHPH dealer isn’t a credit boost at all. They usually don’t report anything positive to credit reporting agencies, but they will report negative actions like a missed payment or repossession. Always ask about their late payment policies before making a decision.
Alternative Credit Bureaus
If your credit score is low or your credit history is light based on traditional credit trade lines (credit cards and loans), but you have a solid history of paying your everyday bills, you may be able to take advantage of alternative credit scoring methods. If you can prove your creditworthiness by having your everyday bills verified, some companies will work with alternative credit scoring methods to offer credit. Alternative credit generally doesn’t carry the same weight as traditional credit lines, so interest rates likely will not be as competitive.
At this point, you can go to any dealer and buy the car you really want instead of being limited to the inventory on a BHPH lot. If you can afford the payments, you can buy a new car that’s under warranty and has no mileage on the odometer. If you can continue to work on your credit and improve your credit score, refinancing may even be available down the road.
However, many lenders still do not use alternative credit and don’t view it as proof of reliability. Most of these alternative credit companies also don’t report your findings to the major credit bureaus. So, while these alternative creditors may be a short-term option, building credit through traditional methods should be a priority.
Why Would I Get Rejected for a Car Refinance?
If you were denied for refinancing, it’s probably because of a poor credit score or a high DTI. Usually, these are the same as the reasons you might be denied an auto loan. Your score may have been satisfactory when you purchased the vehicle but taken a few hits since its purchase.
How to Get Approved Next Time
Before you reapply for an auto loan, make sure all your information is in order. Gather your records and make sure everything is ironed out and correct before you go to a lender. For a better shot at loan approval, your credit score should be in a comfortable range, and you shouldn’t have any large outstanding debts. Always check your credit score before you apply. If it’s not high enough for loan approval, work to improve your credit first. Then, make sure you’ve determined what type of payments and interest you can afford.
If you do get denied, don’t worry! By making sure you meet all of the income, credit and debt requirements for an auto loan, you can increase your chance of getting accepted the next time you apply.