Applying for a car loan may seem like a mysterious process. You complete reams of paperwork, submit it to a loan officer, and then discover if you’ll be riding home in the car of your dreams.
But there’s no guarantee that your loan request will be approved. Hundreds of conditions, from typos to low credit scores, can assist in the rejection of your application.
Read ahead to see five reasons why you didn’t get that car loan and learn how to remedy them for your next application.
1) Bad Credit
Your credit score is key to getting approved for a car loan. If your score is suboptimal, lenders will consider the loan riskier and deny your application.
Furthermore, certain minor situations –from applying for a rental apartment to seeking a mortgage – temporarily affect your score, so try not to apply for a car loan around the same time as other financial events in your life. If you’ve recently borrowed money, your higher debt-to-income ratio will also decrease your score.
But rest assured that you have several options at your disposal if any of these circumstances stand between you and your car loan. You could get a cosigner – a friend or family member with good credit – who will vouch for the loan. If possible, you can reduce your debt ratio and boost your score with lump sum payments. Applicants with low credit scores may have better luck applying for a loan at a credit union, which are likelier than banks to approve loans for people with poor credit.
2) Paperwork Mistakes
Car loan applications ask a lot of questions. If you provide the wrong information – either accidentally or fraudulently – your application will likely be rejected. Mistakes such as misspelling a name or listing an old address are relatively common for borrowers rushing through the application. Occasionally, applicants will fraudulently submit paperwork using another person’s name, address, or credit score, and this could result in criminal charges. Bottom line: Write legibly, use your own information, and triple-check your application for mistakes before you submit it.
Car loans also entail a lot of paperwork, including copies of your driver’s license, proof of income, and auto insurance policy. If any of the information requested is missing from your application, your loan could be declined. Again, triple check that you have submitted all of the documentation required.
Finally, check your credit report for mistakes as well. Reporting mistakes happens, and you might find that your credit report contains incorrect information that has affected your score. Before you apply for a loan – or if you are considering reapplying after your loan was denied – get a free report from Experian, TransUnion, or Equifax, and comb it for errors.
3) Irregular Income
Loan seekers without steady incomes draw additional scrutiny. People who work as freelancers, seasonal employees with irregular income, or under-the-table service providers may have trouble convincing a lender that they can afford to repay the loan. An uneven income is a red flag because lenders look for evidence that you will be able to repay the loan. “Many lenders use debt-to-income ratios to qualify loan applications, so having full-time employment reduces their risk,” says Philip Reed, automotive writer for NerdWallet. “However, if your credit score is high, this could get you a good loan at a low interest rate, even if you're a freelancer.”
Bringing on a cosigner could help assuage lenders’ concerns. “A co-signer, with good credit, basically reduces the lender's risk,” Reed says. “Now they have two people who are motivated to make payments to protect their credit history.”
4) Limited Credit History
Younger consumers who haven’t had the opportunity to establish their credit histories are likelier to be flagged than applicants with longstanding financial reputations. Lenders look for historical patterns that suggest you will be able to pay back your loan. If you are new to the credit game, take a step back, reevaluate your needs, and focus on building your credit and reputation before reapplying for that loan.
“Getting denied for a car loan can be a blessing in disguise,” says Jamie Page Deaton, managing editor of U.S. News Best Cars. “For younger consumers who lack credit history, being denied a loan often means being denied enough rope to hang yourself with. Still, younger buyers can look into alternative financing options, like getting a co-signer, if they really need a car.”
5) Requested Too Much
Even if your credit is in shipshape, the amount of money you request to borrow from a lender often determines whether your loan gets approved. You may ask for enough money to buy your dream car, but banks can only lend you a certain amount based on your credit score and current income.
If you have your eye on, say, a Mercedes-Benz AMG, but don’t yet have the income to back it up, don’t fret. “If you get turned down for a loan because you want to borrow more than you afford, it’s disappointing, but ultimately the lender is doing you a favor,” Deaton says. “You don’t want to ruin your credit by taking on more debt than you can afford, no matter how nice the car is.”
More Shopping Tools From U.S. News & World Report
If you need help getting a great deal on your new car, head over to our best lease deals and financing deals pages. There, we’ve compiled a list of all the best incentives manufacturers are currently offering.
Once you’re ready to buy, be sure to use the U.S. News Best Price Program, where shoppers save an average of $3,279 off their new car purchase.
In addition to savings off MSRP, getting the best interest rate on your car loan can save you thousands as well. Compare rates from up to four lenders with MyAutoloan to get the best deal.