Why You Might Have Been Denied a Car Loan (and What to Do About It)

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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 - June 30, 2020

A poor credit score is only one of the many reasons why you might have been denied a car loan. While there are a lot of explanations for a denial, finding the right lender could be the trick to getting approved for an auto loan.

First: Check With the Lender

If you’ve been denied vehicle financing by a lender, they're required to let you know why. However, if it keeps happening, and you’re not sure of your next step, there are some common denial reasons. We're covering what they are, and what you may be able to do to fix the ones affecting you.

“You Don’t Have Enough Income”

This problem is probably harder to fix than most, but the answer often lies in choosing a cheaper car. A cheaper vehicle means financing less, which means a smaller monthly payment.

Additionally, you can increase your chances of an approval by having a large down payment, which lowers the amount you’re financing, as well. Down payments also lower your risk as a borrower, since you’re proving to the lender that you’ve got skin in the game.

If the problem isn’t that you’re lacking income, but that you don’t have earned income (W-2 income), you’re going to run into issues getting approved for financing. For example, if you’re collecting unemployment, no lender is going to accept that income as a method to repay the loan, because it’s temporary and won’t last for the entire loan term. Any other types of temporary income, or income that can’t be garnished, also won’t typically make the cut.

A possible solution to not having enough income, or the “right kind” of income, is asking your spouse or life partner to sign onto the loan with you as a co-borrower. Co-borrowers can typically combine their income to increase their chances of getting approved for big-ticket items. If your spouse has enough earned income to qualify for the loan, it could be the boost you need.

“You Have No Credit”

When someone says you have “no credit,” they don’t mean that your credit score is “zero.” It simply means that you don’t have a credit history, which doesn’t help lenders decide if you’re a good borrower. It’s called having a thin credit file – your file is literally thin since it doesn’t have much, or any, information in it.

Without proof of how you’ve handled credit in the past, lenders can be hesitant to approve you since you haven’t yet proved yourself in the world of financing. However, as a new borrower with a clean slate, you’re not in as bad of a position as you might think.

The issue of having “no credit” is common, since everyone has to start somewhere. Here are two common solutions for new borrowers:

  • Open a secured credit card – Essentially a debit card that you load with your own money, but it reports like a credit card, boosting your credit score and building a credit history if you handle it responsibly. In most cases, these types of credit cards are easy to get approved for.
  • Apply with a cosigner – Oftentimes, new borrowers can ask a parent or close family member to cosign on the auto loan with them. Cosigners “lend” the new borrower their good credit score to help them get approved, but they don’t combine their income with yours. However, the cosigner does agree to pay for the loan if the primary borrower is unable to (but it's a last resort – borrowers must have enough income on their own to pay for the car loan).

“Your Credit Score Is Too Low”

Having a bad credit score can mean getting denied for an auto loan, even if you’ve got the income to pay for it. Since car lenders use your credit score to determine how well you’re likely to repay the loan, a bad credit score is a common denial reason.

However, there are lenders that can work with borrowers who have less than stellar credit: subprime lenders. These lenders operate through a dealer’s special finance department, and they consider more than just your credit score when you apply for auto financing.

To be considered for a loan by a subprime lender, you’re going to need things like: check stubs, utility bills, ID, a list of personal references, and possibly more. You should also expect to need a down payment of at least $1,000 or 10% of the vehicle’s selling price.

Subprime lenders also report loans to the credit reporting agencies; if you make the car payments on time, you can rebuild your credit history.

If your credit history is really rough (for example, multiple repossessions or a few bankruptcies), your best bet is to look at a dealership that offers in-house financing. These are used car lots where the dealer is also your lender, and they’re often called buy here pay here (BHPH) dealerships.

They don’t normally care about your poor credit score, since they really only need to know if you have a steady income to pay for the vehicle loan. You should expect to need a sizable down payment, possibly around 20% of the car’s selling price.

At the same time, don’t always expect your credit history to be repaired with a BHPH loan, because the dealer doesn’t always report it. Still, if you need a vehicle quickly and you’ve got a tarnished credit score, in-house financing could be for you.

Finding the Financing You Need

Many times, getting into your next (or first!) auto loan means finding the right lender for the job. If you’ve been faced with denial after denial, you may need to look for a different kind of lender, or a different kind of dealership!

Here at CarsDirect, we’ve got the connections to put you on the right path to car financing. We have created a nationwide network of dealers that work with borrowers with many credit types, and we want to help you get in touch with one near you. To get started, fill out our auto loan request form – it's quick, easy, and secure, and we’ll do the hard work of finding the dealership for you.

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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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