Denied for a Auto Loan? What to Do Next

FT Contributor  | 

It may seem impossible to save enough money for a car and pay for the purchase in one payment. If you simply can’t save enough money to buy the car you want outright, you may qualify for an auto loan.

A car loan is just like a personal loan because you borrow the money from a lender and make payments monthly plus interest until you’ve paid off the loan balance. The car is held as collateral for the loan so the lender feels secure lending you money.

To mitigate the risk of taking on a loan, each lender has its own eligibility requirements a borrower must meet. Most of these qualifications are related to the borrower’s credit report, debt, and income. If you applied for an auto loan but were denied, it’s important to understand the reason for your denial so you work on your eligibility and eventually make your car purchase.

Reasons You Were Denied a Car Loan

If you applied for a car loan but the lender denied your application, it’s important to ask the reason for the denial. Depending on your situation and the lender’s loan qualifications, you may have been denied for one of several reasons, such as an application error, a credit score you need to increase, or too much debt.

Application Errors

If you’re sure you meet all the lender’s qualifications for a car loan but you were denied, the reason may be a simple loan application error. Your loan application could have easily been denied due to an error if you:

  • Missed a section: If you filled out your loan application online or mailed it in and didn’t have a lender review it first, you may have missed an important section within the document. Some lenders automatically send you a car loan denial letter if you failed to complete a section on the application.
  • Had a misspelling: If you allowed a finance department representative at the car dealership to fill out the loan application for you, they may have misspelled your name or transposed numbers in your Social Security number. This may have made it impossible to pull your credit history, leading to a denial.
  • Didn’t provide enough information: You may have forgotten to include an additional source of income you receive each month or you may not have added up your entire household income when asked for it on the application. Because you left out income sources or another detail about your finances, the lender may not have felt you were financially prepared to take on the loan.

Low or No Credit

Your credit score is one of the most important elements a lender reviews when you submit your car loan application. To determine eligibility, the lender makes a hard inquiry on your credit report to review your history and score. If your score isn’t high enough or you don’t have enough history on your report, you may be denied a loan.

Too Much Debt

The information you provide on your loan application and your credit report provides your potential lender with details on the debt you currently owe. If the lender feels you can’t remain financially stable after taking on another loan, they may deny your application.

Next Steps After Getting Denied a Car Loan

If you’re denied for a car loan, there are ways to improve your financial situation so you can eventually become eligible to finance your auto purchase.

Review Your Application

A simple error or missed section on your application may have caused your loan denial. Review your application to ensure you provided all information requested thoroughly and accurately. Contact your lender if there’s a mistake on your application so they can review it for eligibility again after it’s corrected.

Work to Improve Credit

If your credit score is the issue, focus on increasing it so you can obtain a car loan. There are many issues that can affect your credit score but you can raise your score by:

  • Paying your credit and loan-related bills on time. Make sure to pay your other bills — rent, insurance, utilities — on time as well — if unpaid bills go to collections, it will hurt your credit.
  • Working to pay off credit card debt.
  • Not allowing for any more hard inquiries on your credit.
  • Waiting until tax liens, bankruptcies, or judgments fall from your credit history.

A higher credit score shows that you don’t pose as big of a risk to a lender. By working to increase your score, you’re more likely to be approved for a car loan and to be offered favorable loan terms.

Decrease Debt

Lenders also analyze your current debt to determine if you can take on another loan. If your debt is the reason for a loan denial, decreasing the amount of debt you have is helpful.

Create a personal budget so you can continue paying off your debt each month. Consider taking on a side job to earn more income and pay down your debt faster.

Build Credit

Your car loan may have been denied due to a lack of credit history. If you work on building your credit, it’s likely you can apply for a loan again and be approved. Start with good financial habits, such as paying your bills on time and limiting your debt. Consider getting a credit card or secured credit card and paying it off each month to build more history.

A car loan enables you to make a vehicle purchase without paying for the entire cost upfront. If you were denied an auto loan, it’s important to identify the reason for your denial so you can work to fix it. By building your credit, decreasing your debt, increasing your credit score, or reviewing your application for errors, you can ensure you get approved for an auto loan the next time you apply.


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