If your car loan application is denied, you might not know where to turn or what to do next. You can start by finding out why you were denied, how long you need to wait before applying again, and what steps you can take, right now and in the future, to prevent it from happening again.
The most common reasons for being denied are:
Bad (or no) Credit: Lenders look at your borrowing history usually in the form of your credit scores, when you apply for a loan. They want to see a solid history of borrowing and repaying loans. However, you might not have borrowed much, or you might have experienced some challenges and actually defaulted on loans in the past.
Not Enough Income: Lenders want to see that you are able to make the minimum monthly payments before they approve your loan. With some loans such as car loans, lenders are required to calculate your ability to pay.
Save yourself some time and frustration before you apply for your next loan. There are strategies you can use that have an immediate effect on your credit score or may result in being approved for the loan:
Down Payment - A larger down payment for your car might help you get approved. You will end up borrowing less, which means your monthly payments will be lower. Plus, lenders have less at risk with a lower loan to value ratio, so they might be willing to approve a loan even without perfect credit.
Calculate What May Work - If you haven’t already done so, use auto finance calculators to estimate how much you can afford to spend on a car in total and what an affordable monthly payment may be.
Go in With a Co-signer or Co-borrower - A creditworthy co-signer agrees to make any missed payments or repay the loan if the borrower fails to do so. A co-borrower is a joint applicant with equal rights and responsibilities to the car and the loan. Adding either of these to an application shows the potential lender there’s less risk ahead.
Compare Options - Remember that there are a lot of lenders in the market today, so you don’t have to settle on just one. While many lenders are quite strict with their requirements, there are some who are more flexible, such as captive finance companies like Volkswagen Financial Services. You have better chances of having your car loan approved when apply for a loan with them.
It’s not the end of the world when your car loan application is rejected by a lender. All it takes is a simple financial assessment of where you are, and the willingness to make large changes and some much-needed sacrifices along the way.