Your car loan application may be denied due to your credit history or current financial situation. It’s inconvenient, but reaching out to lenders and improving your finances will allow you to work on building your application to qualify for more competitive car loan fees in the future.
What should I do if my car loan application is rejected?
One of the refusals does not mean that you can’t fund your car. Before applying again, take a few steps to increase your chances of approval.
Please contact the lender
The lender should give you a specific reason for your application being rejected. If it has not been sent automatically, please request it within 60 days from the application. Otherwise, it lies outside the limits set by the Equal Credit Opportunity Act.
If it’s as simple as an application error, you can adjust and reapply it. If the reason is your credit score or other liability, you can work to improve your situation before applying again.
Improve your credit score
Your credit score is one of the main factors that lenders consider when applying. Over time, improve your credit score by paying your debt on time and lowering your credit usage.
Another easy way to build credit is to report rent and utility payments through self-report. This can take months, but it can pay off over time. Building a solid repayment history these days will make your lender consider you a low risk.
Minimize debt
Reducing your debt is important to attracting future lenders. Avoid new loans and credit cards while focusing on current debt, particularly revolving credit.
Check your budget and try removing unnecessary expenses before reapplying. Debt consolidation is also a great way to minimize DTI if you have minimized your credit card spending after consolidation.
Save for a bigger down payment
A larger down payment means fewer loans during the repayment period and lower borrowing costs. Look at your spending plan and if you can free up your funds, you’ll make cuts. You can also look for ways to increase your income and accumulate savings in the short term.
Ideally, you should create a down payment of 10-20% or more of the purchase price. This will increase your approval odds and qualify for a more competitive auto financing transaction.
Why you were denied a car loan
The lender will send you a denial letter outlined why your application was not accepted. Please check carefully to decide on your next step. It may not be approved due to errors, credit scores, or debt income (DTI) ratios.
Application errors
A simple error in the application allows you to refuse a loan. If you accidentally miss a section or memo information, your lender may reject your application. Make sure you check each application details to make sure everything is correct. It may be possible to apply it again, but first time accuracy can save you time.
Insufficient credit score
Most lenders have a minimum credit score as part of their eligibility criteria. Generally, lenders prefer borrowers with fair credit with a FICO score of at least 620, but some banks and online lenders are at a minimum. If your credit score is lower than the lender’s requirements, you will be denied immediately. Check your credit score in advance to see what kind of loan you are looking for.
Limited credit history
If your credit history is limited or not, the lender cannot measure your ability to make future car loan payments and may use it as a reason to reject the application. Unfortunately, it takes time to fix this. Before you apply again, you may need to assume other obligations to build your credit history or to build your credit history before applying with Cosigner.
A large amount of debt
If you have substantial debt collected from other loans or credit cards, you will have a higher DTI, or debt-to-income ratio. A DTI of 50% or more can lead to rejection as the lender determines how much you can afford based on your income, current debt, and the amount of loans requested. Paying off your debt is the best way to lower your DTI, but if possible, your second source of income can also lower your DTI.
Consider leasing your car
If you are unable to obtain approval for your car loan, leases may be an option. However, leases still often require good credit to good credit to qualify. You need to do some scripts to find a dealer who is willing to work with you, and if you are approved, expect a higher money factor, which is the price you pay to lease the vehicle. This is a short-term arrangement, but you can use this time to save money on your down payment and build a credit score with timely monthly lease payments.
Other vehicle financing options
Your choices don’t depend on your ability to quickly improve your credit and lower your debt, but both will help you access better rates and more affordable car loans.
Find a poor credit lender
A bad credit car loan may help you work faster. These lenders are especially on the market for drivers with low credit scores. However, please compare the options carefully.
Auto loans for bad credit tend to have much higher interest rates, which can cost thousands of people in the long run. To get the best possible rate, save a lot of down payments, even if you’re bad at credit, and choose a cheaper used car.
Buy here and pay the dealer here
BHPH dealers, or buy money, payer dealers can be the easiest option if you have a low credit score and are desperate for your vehicle. These dealers sell and fund cars in lots. Credit approval criteria tend to be lower, and the process is much faster than traditional lending.
Interest rates tend to be very high, with fewer vehicles available. You may also face add-ons like GPS trackers. This is something the dealer uses to get the vehicle back if they are late in paying.
Add a co-load or cosine
If you are not approved for a car loan, consider adding another party to your loan. Cosigned Auto Loan is about getting someone else to help with the loan, even though you are fully responsible for your monthly payments. However, unlike co-borrowers, Cosigner does not have legal ownership.
Joint applications can also lead to lower interest rates and the ability to undertake larger loans, as they add income. Lenders will take into account both borrowers’ income and credit scores when making their approval decision. Your and your co-borrower’s credit history will also be considered to assist in the application process.
Conclusion
If you are rejected, take a step back. Your lender should provide a letter indicating why your application was rejected.
Preparation is as important as anything in the financial realm. The next time you apply, you will conduct a survey, pay attention to your credit score, and lower your total debt in advance. This ensures that your applications are competitive and means it’s easy to manage your car loans in the future.
