When you need a car and you have poor credit, you have very limited options. You can purchase a car at a lot that will finance the loan for you at exorbitant interest rates, or save up and pay cash for a car.
Unfortunately, it is not always practical to rely on public transportation and there are parts of the country where you need your own car to get around. Additionally, if you work odd shifts, you may have a difficult time taking the buses to work.
Look to purchase a car? Car Loans Of America is here to help.
Common reasons lenders deny car loan applications
There are several reasons why your car loan application might have been rejected. Let’s take a look at the most common simple mistakes
You might be surprised how many car loan applications are rejected on a technicality. You might have been rejected because you didn’t:
- Filled out all required sections.
- Provided sufficient details for your income, identity, employment and loan purpose.
- Proofread your answers.
Below are some of the reasons why your application might not be approved.
Your credit history is a strong indication of how likely you are to pay back or default on a loan. It includes details like past bankruptcies, outstanding debts, overdue accounts, and previous credit inquiries. A higher credit score means a lower risk for lenders. Check your credit score before applying for a car loan to see your risk.
Income and employment history
Your income and employment are one of the main factors lenders consider when approving your loan. If you’re not earning enough, only just started a new job or have an unstable employment situation, you’re more likely to be considered high risk.
If income is an issue, applying for a used car loan likely gives you a higher chance of success. Are you’re self-employed and can’t provide all the relevant income documents, consider applying with a cosigner. These may also be an effective option for borrowers who don’t want to provide full income and employment details for an application.
Other loans or outstanding debt
Lenders like to take a look at your debt-to-income ratio (DTI) in addition to income. If you have a DTI under 43%, you might have a hard time qualifying for a loan. You can use our DTI calculator to make sure yours isn’t over the line.
Over 43%? You might want to consider consolidating your debt before you apply for another loan. This involves combining several smaller debts into one large debt, simplifying payments and maybe even getting a better rate.
What do I do if my car loan is rejected?
If your car loan application is rejected, there are three simple steps to take before you apply again:
- Ask why. Lenders typically explain why your loan was declined if you ask. This can give you an idea of what to do differently next time, and whether the issue is a problem with your finances or the lender’s strict 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 gathered all the information you need and ensure that your application is well-suited to the terms and conditions of that lender.
When you apply for a car loan, you’re really getting two things: the car itself and the loan for your new vehicle.
Some people may look at a car loan’s monthly payment and overlook the total cost of financing. But by taking steps to shop around for the best all-around car loan terms for you, you may be able to save hundreds or even thousands of dollars by the time you pay off your loan.
Sure, it may not be your idea of a fun Friday night, but shopping around for a few hours to save big bucks could effectively be the same as paying yourself an uber-high hourly wage for the time you put in. And who wouldn’t want that?
Confused on how to apply for an auto loan? Let’s look at some steps to take when you’re looking for a loan. Ready? Fasten your seat belt, and let’s go.
Determine your budget
If you walk straight onto a car lot with nary a thought about the price, the first thing a car dealer may ask is, “What’s your monthly budget?”
They’ve got a good reason to do so. If you’re focused on just how much car you can get for the monthly payment you feel you can afford, you may overlook the fact that your loan is for a longer term than you wanted.
That longer term may mean a lower monthly payment, but you’ll make more of them and probably pay more interest than you would have with a shorter-term loan.
Instead, a better way to approach a car loan is to focus on the overall cost of the car — i.e., the final price tag, including a total number of payments and interest you’ll pay. That way, you’re comparing apples to apples while you shop around, and you’re not letting a dealer “pack” your loan with unnecessary features that might fit your monthly budget, but could have you paying more in other ways, say with a longer loan term.
How do I run the numbers to see how many cars I can afford?
There are a lot of factors that can determine how many cars you might be able to afford, such as the car loan’s term, what interest rates you might qualify for, how much down payment you have, etc.
The Consumer Financial Protection Bureau’s auto loan worksheet or an online car loan calculator may help you decide how many cars you can afford to buy.
Check your credit scores and reports
It’s a good idea to check your credit scores and reports before you apply for a car loan.
If you have poor credit, you’ll probably qualify for higher rates than if you had better credit. You’ll have to decide whether to proceed with getting a car loan, or whether it’s a better idea to wait and work to improve your credit first.
If you already have excellent credit, congratulations! You may be able to use your good credit as a bargaining chip with lenders to negotiate better terms on your car loan.
How can I improve my credit?
There’s no quick-and-easy path to better credit. In fact, it can take a while to establish your credit. But if you need a car sooner than later, taking some of these steps could help improve your overall credit and may get you further than you think.
Pay down debt (especially high-interest debt, like credit card debt)
Ask your credit card company to raise your credit limit (and don’t spend up to it!)
Keep your existing credit cards open as you continue to pay down their balances
Become an authorized user on a responsible friend’s or family member’s credit card
Shop around for car loans
Now that you have a better idea of where your credit stands and you know what size loan you can afford, you may be ready to start shopping around for rates.
Three of the main places to apply for a car loan include …
- Banks or credit unions
- Online Lenders
Your task now is simple: Visit, call or check the websites of a number of banks and credit unions to ask for a quote. You can check out some options on Credit Karma.
Should I consider a personal loan to buy a car?
Why all this bother with car loans anyway? Why not just apply for a personal loan instead?
As it turns out, there’s a very good reason: the interest rate. Because car loans are typically secured by an asset (usually the car, which the lender can typically repossess to recoup costs if you default on the loan), lenders may offer lower rates than they do on unsecured loans, including unsecured personal loans.
Start Planning to Make Your Next Car Purchase Easier
Since a car may be a necessity, depending on your location, you should set up a sinking fund for your car now. This means that you set aside a little bit of money each month for repairs and to use towards purchasing a car in the future.
If you still have a car payment, it may not be as much money, but if you do not have a car payment, you can set aside the amount you were paying on your car each month. The money will add up more quickly then it took for you to pay it off because you are not paying interest on the principle.
If you have an older car that will need repairs, you should be setting aside money each month to help cover the cost of your repairs. Doing the routine maintenance on your car will help it last longer and help you avoid some expensive repairs in the future.
How can I avoid getting denied again?
The key to avoiding rejection is meeting the lender’s requirements before you apply. If your application is 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 meet these before you apply. Otherwise, you’re almost guaranteed a rejection.
Check the credit requirements. Lenders will sometimes require that you 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 lender’s criteria.
Check the income and employment requirements. If you’re unable to meet the specific income or employment requirements, find a different lender that isn’t as strict.
Pay off any outstanding loans. It’s a good idea to pay off your debts before taking on more. You’re more likely to have a loan approved if you can prove that you’re able to repay the money you borrow.
Some lenders may have a specific waiting period between loan applications, but for the most part, there is no specified waiting period between loan applications. How long you should wait depends on the reason you were rejected. If you were denied because of bad credit, wait to apply until after you improve your score.
If your application was rejected because your debt-to-income ratio was too high, paying off your debts is a good way to make yourself appear as less of a risk to lenders.
Dealers have stringent criteria when it comes to who they’ll lend to. Your best course of action will be to approach the dealer with an outside source of financing. This cuts out the dealer entirely.
You don’t always have to go to a bank or car dealer to get a loan, especially if you’ve already been rejected. An online lender may be able to finance your loan, and there are always car loan brokers that can connect you with a lender if you’re having trouble comparing your options.
If all of this seems like a hassle compared to walking into one of those “buy-here-pay-here” car lots, we’ll admit it just might be. Determining your budget, checking your credit, and running through all the minutiae to shop around before you apply for a car loan isn’t exactly quick or easy.
But, here’s why you should do it: You might save money in the long run. Don’t believe us?
Let’s say you take out a $20,000 car loan for 48 months. If you settle for a high-interest rate say, 9% you’d end up paying around $3,890 in interest charges before paying off the loan.
But what if you do the work to find a better interest rate (say, 5%?) Then you’d only owe around $2,108 in interest $1,782 less, and the savings may only cost a few hours of your time
A loan rejection isn’t the end of the world. It gives you a chance to figure out what you’ve done wrong and improve for next time. Take some time to compare your auto loan options so you can tackle your next application with confidence.