What to Do When Your Car Loan Application is Rejected?

Facing rejection on a car loan application can be disheartening and frustrating. However, it's important to remember that a rejection doesn't mean the end of your dream of owning a car. In fact, it can be an opportunity to reassess your financial situation and take proactive steps to improve your chances of securing a car loan in the future. 

In this blog, we will guide you through the steps to take when your car loan is rejected. 

 

Common Causes of Car Loan Application Rejections

 

1. Poor Credit Score

When applying for a car loan in Canada, lenders review your credit score, with FICO being the most commonly used scoring model. If your credit score falls below 580, considered poor or subprime, most lenders will reject your application due to the high risk of defaulting on the loan.

 

2. No Credit Score

Having no credit history or an indeterminable credit score can also lead to loan rejection. Lenders perceive a lack of credit as a risk because they cannot assess your financial responsibility accurately.

 

3. Errors in the Credit Report

Errors in your credit report can negatively impact your credit score, potentially leading to loan rejection. It's crucial to review your credit report for inaccuracies before applying for significant loans.

 

4. Insufficient or Unstable Income

Lenders prefer stable income sources, and applications with inconsistent income histories may face rejection. Self-employed individuals relying on commission or contract work may encounter stricter requirements to prove their financial stability. Lenders may require extensive documentation for unconventional income sources, and failure to provide satisfactory proof may lead to rejection.

 

5. Inaccurate Information

Providing incorrect information on the loan application, such as income, employment status, or homeownership, can lead to rejection. Lenders scrutinize the details provided and dishonesty raises red flags.

 

6. High Debt-to-Income Ratio

Lenders consider your debt-to-income (DTI) ratio to determine if you can afford the loan payments. If your DTI ratio exceeds their limits, your car loan application may be rejected. Although most lenders prefer a DTI ratio below 36%, some may approve loans with ratios up to 48%.

 

7. Loan Amount Exceeds Limitations

Sometimes, the loan amount itself can be a reason for rejection. If the loan amount, combined with other factors like DTI ratio or income, exceeds the lender's criteria, they may offer a lower loan amount or reject the application altogether.

 

8. Excessive Loans or Debt

If you already have numerous loans or high levels of debt, lenders may reject your application due to the increased likelihood of default. They primarily consider your DTI ratio rather than individual loan repayment history.

 

Read: Consequences of Defaulting on a Car Loan

 

Steps to Follow When Your Car Loan Application is Rejected

 

1. Find a Cosigner

Consider finding a trustworthy cosigner who is willing to share the financial responsibility of the car loan with you. Lenders will assess the cosigner's credit score, income, and other factors when reviewing the loan, potentially increasing the chances of approval. However, both you and the cosigner should understand the shared financial risks involved.

 

2. Reduce the Loan Amount

If the lender is not willing to approve the loan amount you requested, you can lower the overall vehicle cost in two ways. Firstly, you can contribute extra savings towards the down payment, reducing the amount financed. Secondly, you can choose a less expensive vehicle that aligns with the lender's comfort level.

 

3. Extend the Loan Terms

By opting for slightly newer vehicles or extending the loan term, you may increase the likelihood of approval. A newer vehicle can result in a lower interest rate, reducing the monthly payment. Extending the loan terms to a longer period can also decrease the monthly payment, making it more manageable.

 

4. Improve Your Financial Situation

If time allows, focus on improving your financial situation before reapplying for a car loan. Work on boosting your credit score, increasing your income, and reducing your debt load. Taking the necessary steps to strengthen your financial profile can significantly increase your chances of approval in the future.

 

5. Pay off Existing Debts

Having excessive outstanding debt can negatively impact your debt-to-income (DTI) ratio and lead to loan rejection. Creating a budget and allocating extra funds towards paying off debts can improve your DTI ratio, making you a more favorable candidate for a car loan.

 

6. Build a Good Credit Score

If your credit score is the primary reason for rejection and a cosigner is not an option, focus on building a positive credit history. Make on-time payments, reduce credit card balances to maintain a lower credit utilization rate, and demonstrate responsible credit management.

 

7. Save for a Larger Down Payment

Increasing your down payment can help reduce the loan amount, making it more appealing to lenders. Start a savings plan to accumulate a larger down payment, either by setting aside previous savings or adjusting the price of the vehicle you plan to finance.

 

Read: 5 Benefits of Making a Down Payment on Your Car Loan

 

8. Explore Alternative Lenders

Consider alternative or online lenders that may have different lending criteria compared to conventional lenders. Some lenders focus more on income, deposit amount, and recent payment activity rather than credit score. Research and connect with lenders specialized in assisting individuals with bad credit or unique financial situations.

In conclusion, a rejected car loan application doesn't have to be the end of your car ownership dreams. It's important to address the reasons for rejection and take proactive steps to improve your financial situation.