7 Reasons Why Your Auto Loan Was Rejected and What You Can Do Now

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Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

, Automotive Content Editor - October 25, 2018

There are several reasons why a lender rejects an auto loan application. Whatever the reason, getting turned down for a car loan can be stressful, especially if you need a vehicle to get to work. Being turned down for auto financing can really take a toll if your credit is suffering, but take heart – here are some tips that could help you secure an auto loan approval.

Common Reason for Auto Loan Rejection

Despite your best efforts, slip-ups can still be made in the process, while, other times, no amount of trying can help you overcome your situation. But, a car loan rejection shouldn't ruin your hopes of financing a vehicle. It should, however, help you see what areas you need to focus on before applying again.

Let's look at seven common reasons that your auto loan application could be turned down, no matter your credit situation:

  1. Paperwork errors – There's a lot of paperwork involved in getting a car loan, and the initial application asks for a lot of information. Illegible answers, incomplete information, or – worse – purposely providing incorrect information could all lead to the lender rejecting your loan request. It's always best to double (and triple) check your application before submitting it. Also, make sure that you have all the required documentation ready to go with your application.
  2. Unstable or insufficient income – If you can't prove how much you make or your source of income, an approval isn’t likely. Lenders want to be certain you can afford your payments. It won't matter how good your credit score is if they're not sure of your income.
  3. Habitually poor credit history – If your credit reports show you continually pay your bills late, make partial payments, and/or show a number of unpaid bills in your past, you may not get the approval you're looking for, especially if you have a poor credit score.
  4. No credit history – Having no credit history can also spell disaster for your loan, especially if you're working with traditional automotive dealers and lenders.
  5. Too much debt – Lenders compare your current debt, including the potential loan and auto insurance payments, to your current income amount using a calculation called a debt to income (DTI) ratio. They total all your monthly bills and divide it by your gross (pre-tax) monthly income. If the outcome is 50 percent or more, lenders are likely to turn down your loan.
  6. Taking on too much debt too fast – If you decide to take on a lot of new debt all at once – such as multiple lines of credit, big-ticket items, or a mortgage – then you apply for an auto loan, you're in for a surprise. While having a diverse credit profile is good, taking on all this credit at once can actually be a red flag.
  7. Asking for too much car – If you try to finance a vehicle outside your price range, even if you're sure you can afford it with a low enough payment, you may end up being rejected. Stretching your loan to the max (84 or even 96 months) just to afford the monthly payment may not be worth it, and you might be asking for more car than you can afford. Remember, the longer the loan term, the more money you end up paying in interest charges. Additionally, a lot can happen in eight years – do you really want to pay on a loan for that long?

What You Can Do If You're Turned Down

If you were turned down for any of these reasons, you don't have to give up hope. There are a few things you can do to help ensure you don't get turned down for a car loan you would've otherwise gotten approved for. Here are some tips:

  • Always know your FICO credit score, and what's on your credit reports. You can get your credit reports from each of the three national credit bureaus by going to www.AnnualCreditReport.com. You can get one free copy from each bureau every 12 months. You can see what lenders see when they look at your credit profile, and you can fix any errors on your credit reports before you apply while also researching things like average interest rates.
  • Make sure all your documents are in order. Before you apply for an auto loan get computer-generated copies of your most recent check stubs. Be sure these include your year-to-date income. Also, gather documents that prove your residency – typically, a current utility bill in your name, at the address on the application. Most lenders need to know they can contact you if needed, especially if your credit is less than perfect. So, proof of a working landline or contract cell phone in your name is often a requirement, along with a list of six to eight complete personal references.
  • Prepare a budget. You can calculate your DTI yourself to see if you're below the lender's maximum. Simply add all of your monthly bills together, and divide that number by your pre-tax monthly income. The resulting number is the percentage of your income that already goes toward monthly bills (lenders want your DTI, including a car and insurance payment, below 50 percent). Another calculation you can do is your payment to income (PTI) ratio. Lenders typically want a maximum monthly car payment of between 15 and 20 percent of your monthly income. To find your payment range, multiply your gross monthly income by the target percentage – by 0.15 to get your low end and 0.20 to get your high end. This gives you an affordable target range for your monthly payment. Be realistic about finding a vehicle that meets your needs and has some of the features you want, but isn't going to break the bank. You can use our New and Used Car Buying Guides to help you find a vehicle that meets both your needs and your budget.
  • Build and improve your credit. If you're without a credit history, a great way to establish one is with a secured credit card. These types of cards require you to make a deposit, which then becomes your credit limit. After that, you use and make monthly payments like a normal credit card, which can help you quickly build credit. If that doesn't seem possible, you can also become an authorized user on someone else's credit card. As an authorized user, you have the benefit of their established credit, and can begin building yours. One of the best ways to improve your credit, however, is to make sure to pay all your bills on time. This goes a long way toward establishing a positive credit history. Credit history is the largest factor in determining your FICO credit score, which is the score most commonly used by lenders to judge creditworthiness.

Trust CarsDirect When You're Ready to Find a Car

There are special finance dealerships available across the country that work with lenders specializing in second-chance car loans. These loans are designed to help people who've been turned down get auto financing. The lenders that work through these dealers look beyond your credit to approve you based on income, employment, and residence, and they're called subprime lenders. Finding these lenders can be difficult because dealerships don't always advertise that they work with people who've been turned down before. That's where CarsDirect can come in handy.

We work with a network of these special finance dealers that stretches from coast to coast and we want to help you find a local dealership. Forget about the stress of going from dealer to dealer being turned down. Simply fill out our free and easy auto loan request form and we'll get to work matching you with a dealership in your area!


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, Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

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