What to do if you were denied for an auto loan

An auto loan application may be denied because of your credit history or current financial situation. While inconvenient, by reaching out to your lender and improving your finances, you can work on building an application so you qualify for more competitive auto loan rates in the future.

Reasons you may have been denied for an auto loan

Lenders will send you a rejection letter that outlines reasons why your application was denied. Review it carefully to determine your next steps — it’s likely that you may not have been approved because of errors, your credit score or your debt-to-income (DTI) ratio.

Errors in the application

You can be denied a loan due to simple errors in the application. If you miss a section or note information incorrectly, lenders may reject you without allowing you to update inaccurate details.

Always review each detail in your application to ensure you have everything correct. You may be able to apply again, but accuracy the first time around will save you time.

Poor credit score

Most lenders have a minimum credit score as part of their eligibility criteria. In general, lenders want to see borrowers with fair credit — a FICO score of 620 or higher — although there are many banks and some online lenders that set much higher minimums. If your credit score is lower than the lender’s requirement, you will immediately be denied. Be sure to check your credit score in advance so you know what kinds of loans to look for.

Limited credit history

If you have limited or no credit history, lenders will not be able to gauge your ability to make future auto loan payments, and they may use it as a reason to deny your application. Unfortunately, it will take time to fix this. You may need to take on other, smaller debts to build your credit history before you apply again or with a cosigner.

Large amount of debt

If you have a substantial amount of debt gathered from other loans or credit cards, your DTI — or debt-to-income ratio — will be higher. A DTI of 50 percent or higher may lead to rejection because lenders determine how much you can afford based on your income, current debts and requested loan amount. Paying down your debts is the best way to lower your DTI, but if you’re able, a second source of income can also lower your DTI.

What to do if your car loan is denied

One rejection doesn’t mean you can’t finance a car. Take a few steps before applying again to boost your approval chances.

Contact your lender

Lenders are required to give you the specific reasons your application was denied. If it isn’t automatically sent, request it within 60 days of your application. Otherwise, it will fall outside the time limit set by the Equal Credit Opportunity Act.

If it was something as simple as an application error, you can make adjustments and reapply. If the reason was your credit score or other debts, you can work on improving your situation before you apply again.

Improve your credit score

Your credit score is one of the main factors lenders consider when you apply. Take the time to improve your credit score by paying your debts on time and lowering your credit utilization ratio.

Another simple way to build your credit is to report your rent and utility payments through self-reporting. This will take a few months, but it can pay off over time. Once you’ve built up a solid recent repayment history, lenders will see you as less of a risk.

Minimize your debt

Lowering your debt is critical to attracting future lenders. You should focus on paying down your current debts — especially revolving credit — while also avoiding new loans or credit cards.

Review your budget and try to remove any unnecessary expenses before reapplying. Debt consolidation is also an excellent way to minimize your DTI — provided you keep your credit card spending to a minimum after you consolidate.

Other auto financing options

Your choices don’t depend on your ability to quickly improve your credit and lower your debt — though both can help you access better rates and more affordable auto loans.

Look for poor credit lenders

Bad credit lenders may help you get behind the wheel sooner. These lenders market specifically to drivers with low credit scores. However, compare options carefully.

Auto loans for bad credit tend to have much higher interest rates that could cost you thousands in the long term. To get the best rate possible, even with poor credit, try saving up a large down payment and opting for a less expensive used vehicle.

Buy here, pay here dealers

A BHPH dealership, or buy-here, pay-here dealership, may be your simplest option if you have a low credit score and are desperate for a vehicle. These dealerships both sell and finance the cars on their lots. Approval standards for credit tend to be lower, and the process is much quicker than traditional lending.

However, interest rates are very high, and there are fewer vehicles available. You may also face add-ons, like a GPS tracker, that the dealership will use to repossess your vehicle if you fall behind on payments.

Add a co-borrower or a cosigner

If you can’t get approved for a car loan, consider adding another party to your loan. A cosigned auto loan is when you still carry the full responsibility of the monthly payments but have someone else backing your loan. But unlike a co-borrower, the cosigner has no legal ownership.

A joint application can also lead to a lower interest rate and the ability to take on a larger loan because of the added income. The lender will consider the incomes and credit scores of both borrowers when making an approval decision. Your and your co-borrower’s credit history will also be factored in to help with the application process.

Bottom line

If you’ve been denied, take a step back. Your lender should provide a letter stating why you were rejected.

As with anything in the realm of finance, preparedness is key. Next time you apply, do your research, keep an eye on your credit score and lower your total debt ahead of time. This will help ensure your application is the best it can be when you submit it.