Denied A Car Loan? Here’s What To Do

An auto loan application may be denied because of your credit history or current financial situation. While inconvenient, by reaching out to your lender and improving your finances, you can work on building an application so you qualify for more competitive auto loan rates in the future.

What to do if your car loan application is denied

One rejection doesn’t mean you can’t finance a car. Take a few steps before applying again to boost your approval chances.

Contact your lender

Lenders are required to give you the specific reasons your application was denied. If it isn’t automatically sent, request it within 60 days of your application. Otherwise, it will fall outside the time limit set by the Equal Credit Opportunity Act.

If it was something as simple as an application error, you can make adjustments and reapply. If the reason was your credit score or other debts, you can work on improving your situation before you apply again.

Improve your credit score

Your credit score is one of the main factors lenders consider when you apply. If your score is low, take the time to improve your credit score by:

Another simple way to build your credit is to report your rent and utility payments through self-reporting. This will take a few months, but it can pay off over time. Once you’ve built up a solid recent repayment history, lenders will see you as less of a risk.

Minimize your debt

Lowering your debt is critical to attracting future lenders. You should focus on paying down your current debts, especially revolving credit, while also avoiding new loans or credit cards.

Review your budget and try to remove any unnecessary expenses before reapplying. Debt consolidation is also an excellent way to minimize your DTI — provided you keep your credit card spending to a minimum after you consolidate.

Save for a larger down payment

A larger down payment means a smaller loan and lower borrowing costs over the repayment period. Take a look at your spending plan and make cuts if you can to free up funds. You can also look for ways to increase your income in the short term to build up your savings.

Ideally, you want to make a down payment of 10 to 20 percent — or more — of the purchase price. Doing so can help boost your approval odds and potentially qualify you for more competitive auto financing deals.

Reasons you may have been denied an auto loan

Lenders will send you a denial letter that outlines reasons why your application was not accepted. Review it carefully to determine your next steps — it’s likely that you may not have been approved because of errors, your credit score or your debt-to-income (DTI) ratio.

Errors in your application

You can be denied a loan due to simple errors in the application. If you miss a section or note information incorrectly, lenders may reject your application. Always review each detail in your application to ensure you have everything correct. You may be able to apply again, but accuracy the first time around will save you time.

Poor credit score

Most lenders have a minimum credit score as part of their eligibility criteria. Generally, lenders prefer borrowers with fair credit — a FICO score of at least 620 — although some banks and online lenders have higher minimums. If your credit score is lower than the lender’s requirement, you will immediately be denied. Be sure to check your credit score in advance so you know what kinds of loans to look for.

Why was I denied a car loan with good credit?

The lender could deny your application if it contains errors. A high DTI ratio, low or unverifiable income, excessive credit pulls or previous repossessions may also trigger an automatic denial.

Limited credit history

If you have limited or no credit history, lenders will not be able to gauge your ability to make future auto loan payments, and they may use it as a reason to deny your application. Unfortunately, it will take time to fix this. You may need to take on other, smaller debts to build your credit history before you apply again or apply with a cosigner.

Large amount of debt

If you have a substantial amount of debt gathered from other loans or credit cards, your DTI — or debt-to-income ratio — will be higher. A DTI of 50 percent or higher may lead to rejection because lenders determine how much you can afford based on your income, current debts and requested loan amount. Paying down your debts is the best way to lower your DTI, but if you’re able, a second source of income can also lower your DTI.

Other vehicle financing options

Your choices don’t depend on your ability to quickly improve your credit and lower your debt — though both can help you access better rates and more affordable auto loans.

Credit unions and community banks

Credit unions and local banks often offer more flexible underwriting than large national lenders. Unlike automated approval systems, many smaller institutions take the time to review the full picture of your financial situation — not just your credit score. 

Benefits include:

• Lower average interest rates
• More lenient credit requirements
• In-person service and counseling 

Most credit unions require membership, but eligibility is often broader than you might think. Check local credit unions to see what options are available in your area.

Fintech and online lenders

A growing number of fintech lenders are offering auto loans or vehicle financing solutions. These alternatives may be based on data such as employment history, bank account activity and payment patterns.

• Many fintech lenders use AI and machine learning to consider a much wider range of data points in assessing risk. This can lead to more personalized loan offerings.
• Individuals with bad credit scores might find fintech lenders’ offers to be more competitive and accessible when alternative data points are used rather than credit score alone.

While these models offer more flexibility than traditional lenders, proceed with caution:

• Rates can be significantly higher than average
• Some lenders may charge fees or prepayment penalties
• Not all are regulated the same way as traditional banks

Consider leasing a car

If you can’t get approved for an auto loan, leasing could be an option. However, leases still often require good to excellent credit to qualify. You will have to do some legwork to find dealerships willing to work with you, and if you’re approved, expect a higher money factor, which is the price you pay to lease the vehicle.

Although it’s more of a short-term arrangement, you can use this time to save up for a down payment and build your credit score with timely monthly lease payments.

Look for bad credit lenders

A bad credit auto loan may help you get behind the wheel sooner. These lenders market specifically to drivers with low credit scores. However, compare options carefully.

Auto loans for bad credit tend to have much higher interest rates that could cost you thousands in the long term. To get the best rate possible, even with poor credit, try saving up a large down payment and opting for a less expensive used vehicle.

Add a co-borrower or a cosigner

If you can’t get approved for a car loan, consider adding another party to your loan. A cosigned auto loan is when you still carry the full responsibility of the monthly payments but have someone else backing your loan. But unlike a co-borrower, the cosigner has no legal ownership.

A joint application can also lead to a lower interest rate and the ability to take on a larger loan because of the added income. The lender will consider the incomes and credit scores of both borrowers when making an approval decision. Your and your co-borrower’s credit history will also be factored in to help with the application process.

Buy here, pay here dealerships

A BHPH dealership, or buy-here, pay-here dealership, may be your simplest option if you have a low credit score and are desperate for a vehicle. These dealerships both sell and finance the cars on their lots. Approval standards for credit tend to be lower, and the process is much quicker than traditional lending.

Interest rates tend to be very high, and there are fewer vehicles available. You may also face add-ons, like a GPS tracker, that the dealership will use to repossess your vehicle if you fall behind on payments.

Bottom line

If you’ve been denied, take a step back. Your lender should provide a letter stating why your application was rejected.

As with anything in the realm of finance, preparedness is key. Next time you apply, do your research, keep an eye on your credit score and lower your total debt ahead of time. This helps ensure your application is competitive and will mean you have an easier time managing your auto loan in the future.