Can a car loan be denied after approval?

You find the perfect car, negotiate a price, sign the papers and drive off. All is well until the dealer calls you and says the auto loan you used has been denied. And they want their car back.

While rare, a car loan can be denied after you thought it was already approved. Here’s a look at why that happens and what you can do.

Why you can be denied a car loan after the purchase is complete

When you get a car loan, a dealership will sometimes allow you to take delivery of the car even though your loan has not been fully approved. And while the likelihood of your car loan being denied is low, it can happen even after you leave the dealership lot.

Here are some common reasons why:

• You lost your job: The lender will likely verify your employment when processing your application for financing. If they’re unable to confirm your employment because you were terminated, laid off or resigned, your application could be denied.
• Your income went down: Whether it’s the result of a job change or reduction in hours by your employer, the lender may decide you can no longer afford the monthly car payments and deny you an auto loan.
• Your application contains unverifiable information: Are there typos in your application? Did you get a new job or relocate after getting preapproved for an auto loan? These are all reasons for the lender to deny your loan if you failed to notify them of the changes.

Dealerships

When buying from a dealership, it’s important to read all the papers you are signing. See if they state the deal has any contingencies — “contingent upon financing approval,” for example.

Sometimes, dealerships use a form called a rescission agreement to outline the contingencies. While there are many kinds of contingencies, dealer financing contingencies are one of the most common. It makes sense when you think about it. You can’t keep your new car if your loan is not approved.

Many dealerships allow you to take your car home before the loan is fully finalized, a practice called spot delivery. But there’s a chance you’ll later be notified that the loan was denied. Although the denial may be legitimate, you may have also been involved in a yo-yo scam.

When you obtain financing from a dealership, the sales rep may offer you an auto loan that sounds too good to be true. After documents are signed and you’ve taken the car home, the dealer will contact you. They will say that your loan has been denied and ask you to accept a new contract with significantly worse terms.

If this happens:

• Review the purchase contract.
• Request the denial letter.
• Contact your state attorney general’s office if you suspect you’ve been misled.

Banks, credit unions and online lenders

Banks, credit unions and online lenders may not approve your car loan if they can’t verify the information you provided on your application, even if you received loan preapproval beforehand.

Most lenders will give conditional approval after briefly reviewing your financial details. And most dealers will allow you to take possession of the car with only this initial approval. You’ll have to sign paperwork allowing them to retake possession if you don’t get final loan approval.

Over the next few days, the lender will look through the information on your application in more detail. If they can’t verify the information, they may deny your loan.

This type of situation can be frustrating, but it happens because lenders and dealers want the car buying process to be quick. Consumers are less likely to buy a car or get a loan from someone who won’t give a loan approval for a few days.

What to do if you’re denied an auto loan after you buy the car

You’ll rarely be denied an auto loan after initial approval unless your information has changed or there was a mistake. Reach out to the lender to learn why your loan application was denied.

Take these steps if the car is already in your possession:

1. Provide updated information:  Update the lender with your new job if you changed jobs and were denied because the lender couldn’t verify your employment.
2. Check if the dealer can rework your loan:  They may be able to work with another lender by giving it your updated information.
3. Review the contract:  You may find that the lender has no legal right to cancel the loan agreement. If so, you may want to consult with an attorney to learn more about what rights may be available to you.
4. Purchase the car another way:  Use savings, credit cards or a personal loan to pay the dealer in full if possible.
5. Return the car:  If you can’t get a new loan and you signed a contract with contingencies, you must return the car.

How to better your auto loan approval chances

It’s wise to avoid major financial changes before you fully close on your auto loan. Here are a few ways to improve your chances of being approved for an auto loan:

• Don’t make any large purchases: Changing your credit utilization ratio can affect your credit score, which may affect your car loan.
• Stay at your job:  Lenders want to know you have a reliable income and can repay your loan.
• Don’t open new credit cards:  New entries to your credit report can make lenders wonder if there is something else going on.
• Look at your credit report:  Take a look at your credit report and ensure there are no errors or inaccuracies hurting your credit score.
• Review your loan application before submitting it: You want to ensure all components of the loan application are accurately completed to avoid a rejection.

The bottom line

While it doesn’t happen very often, it is possible to be denied a car loan even after taking possession of the car.

To minimize the odds, try not to make any major changes to your finances or credit until your loan is finalized, including not changing jobs, if possible. If you are denied, you’ll need to either work with the seller to secure a new auto loan, pay for the car in full or return the car and go back to auto shopping.