Find out why you might have been rejected and how to improve your chances of being approved.
If your application for car finance was denied, it’s an opportunity to go through your financial history and see where it can be strengthened. However, rejected loan applications can count as a black mark on your credit history, so it’s a good idea to try to make sure you have the best chance of success before you begin.
This means understanding why lenders reject applications, and knowing what you should do if it happens to you.
Why are car loans rejected and what you can do about it?
If your loan is rejected, the first thing to do is to make sure you have completed the application correctly and that it wasn’t turned down on a technicality. Double-check that you:
- Filled out all sections of the application completely
- Provided sufficient details of your income, identity, employment and loan purpose
- Completed all sections accurately
- Met all eligibility requirements, such as minimum income amount and purpose of loan
If your loan application was completed correctly and still turned down, it was probably because the lender found red flags in one or more of the criteria outlined below. Lenders look at these criteria to determine whether you’re a high-risk (more likely to default) or a low-risk (more likely to pay it back on time) applicant. Lenders generally prefer to do business with low-risk applicants, so this is the group you want to be in.
- Your credit history
Your credit history is a strong indication of how likely you are to pay back or default on a loan. It includes details of events such as past bankruptcies, outstanding debts and overdue accounts, and previous credit enquiries. A higher credit score means lower risk for lenders.
- If you haven’t already, it can be a good idea to check your credit score before applying for a car loan.
- Financial events such as defaults, bankruptcies repayments and credit enquiries can stay on your credit file for two to seven years, depending on the event.
- Current income and employment history
One of the main factors lenders consider is your current income and state of employment. If you’re not earning enough to pay back the loan, only just started a new job, or have a less than stable income or employment situation, then you’re more likely to be classed as a high-risk applicant.
- Self-employed people might not be able to provide all the income documentation, and might need to opt for a low doc car loan. These may also be an effective option for borrowers for whom it would be detrimental to provide full income and employment details during their application.
- Applying for a used car loan is likely to give you a higher chance of success than a new car loan if income is an issue.
- Other loans or outstanding debt
If you are currently paying back other loans, or have other forms of debt, including credit card debt, then you’re a higher risk applicant.
- Debt consolidation might be a sensible step to think about. This involves combining several smaller debts into one large debt, simplifying payments and potentially providing a preferable repayment scheme. Setting up a single repayment can come with its own costs, so make sure you look into these before making a decision.
Are you a high-risk applicant?
If you’re having trouble getting a car loan because you’re a high-risk applicant, there are two options that are immediately available.
- Secured car loans: A secured car loan involves using the car itself as collateral, which increases the risk for you and decreases the risk for lenders. It can get you better rates, and means you can get approved for loans that might otherwise have been turned down. However, it also means that if you can’t keep up with repayments, the lender can repossess the car.
- Personal loans: Taking out a personal loan to purchase a car is a further option. There are a variety of personal loans available, and being rejected for a car loan doesn’t mean you’ll be rejected for a personal loan.
How to avoid being rejected for a car loan
The key to avoiding expensive car loan application rejections is to make sure you’ve met the lender’s requirements before you apply. Ideally you will be confident of your success with every application. If you are declined, ask the lender the reason. They can inform you of any weak points in your application that you might have missed, and you can take the appropriate steps to resolve these for next time.
Also, if there are any inflexible eligibility requirements, such as a minimum income, or documentation that needs to be submitted, it’s important that you are aware of these, and that you have everything that is necessary before applying.
- Check the credit requirements: Lenders will sometimes list requirements such as “must have good credit”, which usually means having no negative listings on your file. Check your credit report before applying and make sure it meets the lending criteria.
- Check the income and employment requirements: If you are unable to meet the specific income or employment requirements of a lender, the easiest solution is usually to find a different lender.
- Pay off outstanding loans: It’s generally a good idea to pay off any outstanding debts before taking on more. It makes good financial sense, and you’re more likely to have a loan approved.
What to do if your car loan is rejected
If your car loan application is rejected, there are three simple steps to take before your next application.
- Ask why. Lenders will typically explain why your loan was declined if you ask them. This can give you an idea of what to do differently next time, and whether the issue is a problem with your finances, or if it’s just something such as not meeting the age requirements.
- Approach without applying. Before making a formal application, contact the customer service team at the lender you’re considering. Get a sense of loan requirements, ask questions, and try to find out whether or not your application will succeed.
- Be prepared for next time. Next time, be ready. Make sure you’ve done step 2 above, and ensure that your application is well suited to the terms and conditions of that lender.