Thinking of applying for a car loan? As with any type of finance, when you apply for a car loan, it’s important you get it right first time if you want to be approved.
Why? If your car loan application is rejected, that rejection is filed on your credit report, which can make it more difficult to get approved next time you apply.
In this post, we’ll look at the five most common reasons car loan applications are rejected, so you can avoid them when it comes your time to apply.
1. Your Credit Score Is Too Low
Your credit score is a numerical representation of your credit report. In other words, it puts a number on how well you handle credit.
When you apply for credit, whether that’s a car loan, credit card, home loan, or any other type of credit, the lender will use your credit score – alongside various other data – to determine how much of a risk you would be to lend to.
If your credit score is low, that tells the lender that you either have not dealt with credit well in the past, or you have not had much experience dealing with credit yet. This may result in the lender deeming you too risky to lend to and rejecting your application.
Solution: Check your credit score before you apply. If your score is low, consider taking time to build your credit before applying. Alternatively, you could opt to borrow from a lender that specialises in bad credit car loans, but these can come at a higher cost.
2. Mistakes On Your Application
When you apply for a car loan, the lender will ask you to provide certain information regarding your financial and personal circumstances. If you provide incorrect information – either by mistake or on purpose – it could result in your application being rejected.
As an example, you may forget to mention a credit card you have in your wallet that you no longer use. Or you may try to avoid adding details of a loan because you missed a few payments.
Either way, car loan providers have stringent methods in place to verify the information you provide. If you forget or omit required information, the lender could easily decline your application as a result.
The same applies for any documentation the lender requests. If you do not provide that documentation in a timely manner, the lender may choose to decline your application due to lack of information.
Solution: Check each application question carefully, making sure you provide ALL information and documentation required. Remember, lying on your application is fraud and it could land you in a heap of trouble.
3. Your Financial Situation Is Not Up To Par
One of the things car loan providers look for when assessing an application is the applicant’s ability to repay the loan. This means looking at how much income you have coming in, what expenses you have going out, and what other debts you are currently paying off.
In checking this, the lender wants to know that you will be able to make your new car loan repayments, and that by taking out the loan, you will not overextend yourself.
Solution: Before you apply for a car loan, create a budget that includes everything the lender will ask of you. Include all incomings and outgoings, working out how much you have to left over. Consider how the new car loan will affect this, and whether it is actually affordable.
4. Your Employment History Is Too Unsteady
Car loans can span periods of one to seven years. When you apply for a car loan, the lender wants to know you will be able to keep making your repayments over the entire loan period. One of the ways to do this is to look at your employment history.
If you have a sketchy history of only staying in a job for short periods of time, then spending time unemployed, it may suggest to the lender that this could happen in the future as well. As a result, the lender may decide you are too much of a risk to lend to and reject your application.
Solution: Before you apply, try to build up a record of steady employment, where you stay in each role for at least a year. Alternatively, you may try applying for a loan from a provider that looks more favourably on applicants with a shorter employment history, but again, this may come at a higher cost.
5. You Want To Borrow Too Much
Got your eye on a car but its price tag is a little too high? If you choose to apply for a car loan amount that results in repayments you cannot afford, the lender will more than likely reject your application.
Again, it comes down to overextending yourself. If the lender decides you will not be able to comfortably make your repayments, your loan will probably be declined.
Solution: Use a car loan calculator to find out how much your repayments will be on your chosen loan amount. Opting for a longer loan can reduce your repayments to make them more affordable, but bear in mind, this will also mean you pay more in interest over the length of the loan.
Instead, you could try to negotiate a better price on the car you want to buy, you could put down a deposit so you borrow less, or you could simply opt for a car that better fits your budget.