What Happens If I Was Denied for a Car Loan?

When you submit an application for a car loan, your lender can approve or deny the application for a number of reasons ranging from your poor credit score to the condition of your car. Every lender has its own underwriting guidelines so you can shop around for a loan from another lender, but you should try and resolve the issues that caused the declination of your original application.

Income

Your lender may decline you car loan application if your debt-to-income level exceeds acceptable levels. Lenders calculate DTI by dividing your monthly debt payments into your monthly income, and generally you can only qualify for a loan if your DTI level remains below 40 percent. To resolve this issue, you can reduce your existing debt load by paying off and closing other loans, or you can take on a new job to create an additional source of income.

Cosigner

If you lack the funds to pay down your debt and cannot generate additional monthly income, then you could ask a friend or relative to cosign on your loan. You need to find a cosigner with a high income level and minimal debt. If you were declined for a loan because you have a poor credit score, then a cosigner with good credit may enable you to qualify for a loan. However, many people are reluctant to cosign on loans because if you default on the debt, then it hurts the cosigner's credit score as well as your own. Therefore, make sure you explain the risks before asking someone to cosign on the loan.

Subprime Lenders

If you cannot resolve your DTI or credit issues then you could consider applying for a loan from a so-called subprime lender. Such lenders specialize in writing high-risk loans for people with poor or subprime credit. These lenders mitigate the risk by charging high interest rates. Additionally, many subprime lenders include hefty fees and prepayment penalties that mean you cannot easily refinance the debt. Therefore, you should only use subprime lenders as a last resort if you have no other way of financing your vehicle.

Considerations

When you apply for credit, your credit score drops by a few points. If a lender declines your application because you have poor credit, then you only make the situation worse by shopping around for loans from multiple lenders. While a small drop in score would not greatly impact someone with good credit, it could cause major issues for someone with a low score. You can improve your credit score by paying past-due debts and settling delinquent accounts. Resolving such matters before you re-apply for a car loan will greatly improve your chances of obtaining credit.