What Can I Do After Being Turned Down for a Car Loan?

Get Car Financing
Even with poor credit.


Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

, Contributing Writer - October 19, 2020

It can be disheartening to get turned down for an auto loan, especially when you need a car! Don’t worry, there are resources for borrowers looking to get into their next vehicle with poor credit and other trying situations.

5 Common Reasons for an Auto Loan Denial

For starters, the auto lender that you applied with should’ve told you why you were denied a car loan. Either they told you in person, or they sent you a letter explaining why you were turned down. However, if you haven’t gotten a solid reason as to why, then contact the lender and ask for details so you can hone in on what’s stopping you from your next auto loan.

In most cases, you likely already know the reason why you’re having trouble getting approved for vehicle financing. Some common reasons for getting turned down for a car loan are:

  1. Not enough income
  2. Debt to income ratio is too high
  3. A repossession listed on credit reports
  4. You’re in bankruptcy
  5. Bad credit or no credit

Most of these issues are fixable, but not all of them can be corrected in a short period of time. We’ve got a few suggestions on how to resolve these denial reasons to increase your approval odds for an auto loan.

1. Not Enough Income

Car lenders typically have a minimum monthly income requirement of around $1,500 to $2,000 before taxes. When you’re denied an auto loan because you don’t have enough income from a single source, some people enlist the help of a co-borrower.

When you apply for a car loan with a co-borrower, both of your incomes are used to meet the income requirements. Co-borrowers are typically spouses or life partners because for someone to qualify to be one, your incomes must be able to be combined.

2. Debt to Income Ratio Is Too High

Lenders take a look at your income and compare it to the estimated monthly loan and insurance payment. They also factor in your other monthly obligations, and divide your bills by your income to get a percentage: your debt to income (DTI) ratio. Your DTI ratio doesn’t include things like grocery bills or utilities, since it’s focused on your other obligations such as rent, loan and credit card payments, and court-ordered payments.

For example, if you make $1,500 a month and you’re expected to pay a $250 auto loan payment, $100 insurance payment, and your other bills are $500 a month, your DTI ratio is around 57%. This is found by adding up $250, $100, and $500 to get $850, and then dividing $850 by your $1,500 income to get 0.566, or 57% percent when rounded up.

As a general rule, lenders turn down borrowers whose DTI ratios are higher than 45% to 50%. If you don’t make enough to comfortably afford the vehicle, the lender doesn’t want to approve you for the loan, and run the risk of overextending your monthly budget.

Lowering your DTI ratio can be hard, but a good place to start is lowering any credit card balances you have, possibly consolidating your debts or student loans, or simply cutting out some expenses that you don’t use or need. Choose a car that fits your needs and wallet for a better chance of getting that approval. A co-borrower might be able to help with this, too, if they add more income and can lower your DTI ratio.

3. A Repossession Listed on Credit Reports

With a repossession on your credit reports that's less than a year old, you’re likely to be turned down by most lenders. Even subprime auto lenders, or bad credit lenders, don’t typically approve borrowers with a repo reported less than 12 months ago.

You can either wait until a year has passed to apply with a subprime lender, or work with a lender that doesn’t review your credit reports: a buy here pay here (BHPH) dealership.

BHPH dealers don’t usually review your credit reports, so your recent repo wouldn’t be an issue in the approval process. However, they may not report your car loan and timely payments to the major credit reporting bureaus, which means there’s no chance for credit repair after the repossession – unlike traditional or subprime lenders.

4. You’re in a Bankruptcy

Borrowers who are in the middle of an open bankruptcy may find it difficult to get an auto loan approval. If you’re in Chapter 7 bankruptcy, your best bet is to simply wait until it’s over before you apply for a car loan. The process is so short that many lenders don’t consider borrowers in Chapter 7 for an auto loan approval at all. Once you’re discharged, though, your approval odds increase exponentially, no matter what chapter you filed.

If you’re in Chapter 13 bankruptcy, there are processes in place to help you get into a car loan if you need it, but you must get court approval to incur more debt. You must also prove that this purchase is necessary. For example, your vehicle broke down and you need another to get to work so you can keep paying on your repayment plan. This is likely to be accepted as a valid reason to take on more debt during bankruptcy.

However, even though there are ways to get an auto loan in Chapter 13 bankruptcy, you probably need a subprime lender. Most traditional lenders are hesitant to work with bankruptcy borrowers.

5. Bad Credit or No Credit

For borrowers with credit scores below around 660, getting a car loan approval with a traditional lender can be difficult. However, some of the easiest ways to improve your credit are: paying your bills on time, lowering credit card debt, and removing errors from your credit reports.

However, repairing a poor credit score can take a lot of time – sometimes months or years. If you need a vehicle now, then try applying with a subprime auto lender.

Subprime lenders are signed up with special finance dealerships, and they look at more than just your credit score to determine your eligibility for a car loan. Some things they look at include: your income, employment history, residency stability, debt to income ratio, and credit reports as a whole.

If you qualify for a subprime auto loan, you can repair your credit with timely payments because the loans are reported to the major credit bureaus. Repairing your poor credit should be a priority since a better credit score means a higher chance of getting approved for credit in the future. Like we said, credit repair is a long-term game!

Find the Car Loan You Need

If you’re in any of the above situations, a subprime lender may be able to assist you in getting a car loan. However, locating them isn’t the easiest task, so let us help with that.

Here at CarsDirect, we know how hard it can be to find a lender that can work with tough credit situations – so we created a nationwide network of dealers signed up with subprime lenders. Get matched to a dealership in your area by filling out our free auto loan request form. There’s never a cost or obligation to buy, so get started now!

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.

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