After home purchases, the next big purchase in most households is a car. The average car loan is similar in size to the average student loan, around $30,000, and they are about as common because many who have gotten out of student loan debt retain a car loan. However common car loans are, and how eager financial professionals are to loan you the money to buy a vehicle, there are four common reasons why car loans are rejected.
Lack of Stable Income
Auto lenders want to know that you can repay the loan. For this reason, many people are rejected when they lack a stable income, whether working in sales, in seasonal employment or have a history of changing jobs. You can reduce this issue by working with a lender who is willing to take this risk, though it comes with a higher interest rate. You can reduce the interest rate they’ll charge by putting more money down.
Your Exaggerations Are Lies
Lying on a resume is just cause for letting you go, even if it is only adding a few skills you barely know. Exaggerating on your car loan to the point it isn’t true is similarly a basis for rejecting your car loan. If you understate your debt or overstate your income in order to meet the debt to income ratio the car lender sets forth, and your credit report shows that you put down incorrect information, they’ll reject you. The fact that you inflated your income by $10,000 in bonuses you might not get this year, or ignored that credit card with some missed payments, is grounds for rejection. Plus, it is legal because they are allowed by law to require the true information as a condition of the loan since those financial factors are the direct determination of your eligibility. Tell the truth about your income and debt levels, and while you may be offered a higher interest car loan, it won’t be a flat rejection.
Outright fraud, such as using a child’s Social Security number on an application or using a fake ID such as when you’re an illegal alien, is not only grounds for rejection for used car loans but a serious crime. Note that omitting critical information may not constitute fraud, but lenders see this as a red flag and will reject applications that leave out any information they request.
Poor Record with Debt
While the average student loan and car loan are about as large, the higher interest rate on car loans means the average car payment is about 50% higher than the average minimum student loan payment. Auto lenders know this is a major expense, and they want to know you can pay it. If you have missed other debt payments, they are reluctant to issue a car loan out of concern you will miss payments. You’ll also be denied used car loans if you recently came out of bankruptcy for the same reason.
Large Loan Requests
There are two risks with large loan requests, whether buying an expensive car or rolling in debt from the old car into the new loan. The first risk is the large monthly payment that the lender is hoping you’ll pay, but with the significant risk that you won’t. The second risk the lender is taking is that the car, when sold, won’t pay off the loan. While this is an issue when they sell a used car for $2,000 less than it is worth, their risk is far higher when you have a $30,000 used car loan secured by a $20,000 vehicle. Most lenders take the safe route and reject such loan requests outright.
If you are about to apply for a car loan, keep these tips in mind.