Your car loan application has been denied. Sure, you’ve had credit issues in the past, but you’ve been trying to do everything you can to rebuild it. What are you supposed to do now? First, relax and take a deep breath. Sometimes being turned down for a loan can be a good thing, as it can shed light on issues with your credit or financial situation. Think of it this way: a car loan denial is a chance to examine your financial history and see where it can be improved.
This is a common scenario in the United States. Many Americans continue to struggle with credit. According to the Federal Reserve Economic Well-Being of the U.S. Households in 2017 (published on May 2018), “During 2017, 4 in 10 adults applied for some type of credit. The most common credit applications were for credit cards and auto loans. One-quarter of those who applied for credit were denied at least once in the past year, and 32 percent were either denied or offered less credit than they requested.”
The good news is that not all hope is lost. There are a few things you can do to improve your chances of getting a car loan.
Find Out Why You Were Denied
Unfortunately, there’s no guarantee your loan request will be approved. Hundreds of factors, from typos in the application to a low credit score, can be the culprits in the rejection of your application. Some of the most common reasons for being denied a car loan application are a poor credit history, current income, and a high debt-to-income ratio.
Your credit score is crucial to getting approved for a car loan. When you first find out you’ve been turned down for an auto loan, the next step should be to check your credit reports from the three major credit reporting agencies—TransUnion, Equifax, and Experian. Once you have your credit reports, look carefully for any negative items such as late payments, past bankruptcies, outstanding debts, and overdue accounts. These negative records lower your credit score and make you a high-risk borrower in the eyes of lenders, which will then be more likely to deny your car loan application. Be sure to examine your credit score before applying for a car loan to see your risk.
Besides your credit score, your income and employment are the other main factors lenders consider when reviewing your loan application. Lenders will look at your entire financial profile, so you should be able to provide them with evidence of a source of income and of how long you've held your current job. They want to see that you can make the minimum monthly payments before they approve your loan. If you started a new job recently or have an unstable employment situation, you’re more likely to be considered a high-risk borrower. In this case, it’s best to wait at least six months to a year before applying for a car loan.
Debt is another consideration when a lender looks at your financial profile. If your debt-to-income ratio (DTI) is more than 20%, you have too much debt. Having a high debt-to-income ratio means that you’re spending at least half your monthly income on debt, which is considered a warning sign to lenders. If your DTI is too high, you will have a hard time getting approved. Credit reports don’t include income information, so they don’t reveal your DTI themselves, but they do show how much debt you’re carrying.
If you were denied a car loan because your debt-to-income is too high, you need to start dealing with your debt. Consider your credit card usage and stop charging. Transfer your balance to a lower-interest card or take a look at your monthly budget and figure out where you can cut.
Other reasons for being denied a car loan are:
Past auto repossessions
Incomplete documentation
Poor management of credit lines
Application errors
Lending restrictions
Credit report errors
Providing wrong information
Bankruptcy or repossession in the recent past
Self-employment or non-standard income
Past-due bills
Ask the loan officer in charge of your car loan application to provide you with the specific reasons you were denied so you can take that info and use to identify a way to resolve your financial issues and get a better start when you re-apply.
Build Credit
Building credit can be tricky. It’s hard to get a loan if you don't have a credit history. Younger consumers who haven’t had the opportunity to establish their credit history are likely to get flagged because lenders usually look for patterns that suggest you are creditworthy and will be able to pay back your loan. In this case, you could start by applying for a secured credit card. Using your card responsibly proves to lenders that you can handle credit and potentially a small loan. Also, try not to apply for a car loan around the same time as other financial events in your life such as seeking a mortgage or applying for a rental apartment, as these situations could temporarily affect your score.
If you have a bad credit score—which is generally considered to be any score under 630—you might find it very difficult to get approved for any loan. Maybe you have made mistakes managing your credit such as missing payments or maxing out your credit cards, but the truth is that you are not alone, many of us struggle with our credit scores. Still, don’t give up on your dream of that new car. There are many ways to improve your credit score and we have some tips that can help you along the way.
One of the first things you should do to boost your credit score is to pay your bills on time. Making a habit of paying your bills by their deadline not only helps you take control of your financial life but also keeps your checking account balanced. Paying your bills on time helps to establish a good credit report, as creditors report your good payment habits to the three major credit bureaus: Equifax, Experian, and TransUnion. The better your record, the more likely your future applications of credit are to be approved.
It would help if you aimed to keep your credit card balances low. The debt-to-income ratio is one of the most critical factors that help determine your credit. It's important to use less than 30% of your credit card balances every month, or your score suffers. It doesn’t matter if you pay off your balances in full every month, what matters is that the credit bureaus see that you can maintain and manage your budget. We recommend that you keep an eye on those balances and consider pre-paying some of the balance if you think you’ll go above the 30% mark this month.
Reducing the amount of debt that you owe is going to improve your credit score. You could start by lowering your credit card usage. Use your credit report to make a list of all your accounts and then go online to check recent statement and determine how much you owe on each account, and the interest rate they are charging you. Develop a payment plan so that you can pay off the highest interest cards first while keeping up with the payments on your other accounts.
Another great way to improve your credit score is to hire a credit repair company. While you can repair your credit on your own, sometimes it makes sense to hire professionals. Credit repair companies are equipped with a particular set of skills and they help raise your credit score by changing or removing incorrect items. They do so by negotiating with lenders to remove or change negative reporting and by taking advantages of loopholes.
They do this because they know the laws that are on your side such as the Fair Credit Reporting Act (FRCA), the Fair Credit Billing Act (FCBA), and the Fair Debt Collections Practices Act (FDCPA) and how to leverage them to your benefit. If you’d like help improving your credit score and eliminating the bad marks on your credit report you can read more about credit repair companies.
Try a Used Car Loan
Freelancers and seasonal employees with irregular income may have trouble convincing a bank that they can afford to repay the loan. As we mentioned earlier, most lenders use a debt-to-income ratio to see if you can handle the payments upon approval of your loan. If it looks like you will not be able to pay back your new loan, they reject your application. If income is an issue, consider applying for a used car loan. This way, you will have a higher chance of success.
Apply with a Co-Signer
Ask somebody with good credit and sufficient income to be your co-signer. However, if you decide to do this, make sure that your co-signer understands the risk that comes with it. If you are not able to pay back your loans, then your cosigner will have to pay them for you.
Fix Any Errors
If you have any errors on your credit report or loan application, now is the time to fix them. Also, as we mentioned earlier, if there are any eligibility requirements, it’s vital that you be sure you can meet these before you apply.
Ready to Re-Apply?
Before re-applying for a car loan, remember to examine your credit report and check for any red flags. It helps to contact the customer service team at the lender you’re considering to ask questions and find out whether or not your application is likely to be approved.
Also, consider applying somewhere else. Try a local bank or credit union and check with online banks, too. Shopping around will increase your chances of approval for any type of loan. Not only does this help you get the best possible rate, but it also gives you a better sense of the overall loan requirements and the consumer profiles lenders tend to favor. Additionally, you may find that some companies are more open to working with borrowers that have less-than-perfect credit.