If you refinance your vehicle you replace your existing loan with an entirely new loan. Consequently, lenders underwrite vehicle refinance loans using the same methods that are used during the underwriting of purchase loans. While a lender cannot discriminate against you, a lender can refuse to finance or refinance a vehicle loan for a number of different reasons.
Value
Vehicles do not last forever. In most instances the value of a vehicle steadily decreases over time as the vehicle approaches the end of its useful life. To keep your loan payments affordable, your lender may have to stretch out your loan term over a period of five or more years. The vehicle's value may drop at a faster rate than your loan payments pay down the principal. When this happens you have negative equity because the loan balance exceeds the vehicle's value. Generally, you cannot take out a loan if the loan-to-value ratio exceeds 100 percent because a lender cannot fully secure its interest in the vehicle if the debt exceeds the market value of the vehicle being financed.
Income
A lender can refuse to refinance your vehicle loan if you have a high debt-to-income ratio, or DTI. You calculate your DTI by dividing your recurring debt payments into your pre-tax monthly income. Loan underwriters can only approve your refinance loan if your DTI remains below a certain level. While DTI limits vary from lender to lender, lenders usually assume that at least half of your income goes toward tax, insurance, retirement savings, utilities and day-to-day expenses. So if you have a DTI level of 50 percent or higher then your lender will probably decline the loan.
Credit Score
A lender cannot accurately predict your future actions simply by checking your credit report but lenders do make assessments about your future borrowing habits by checking your credit history. Lenders regard people with low credit scores as high-risk borrowers because history shows that these borrowers previously defaulted on their debt obligations. In most instances you have to have a credit score of 620 or higher to qualify for a loan. But each lender sets its own standards and some lenders require credit scores that exceed 700.
Collateral
A lender can turn down your loan application if the vehicle that you intend to finance does not meet the criteria listed in the lender's underwriting guidelines. Most lenders place age caps on vehicles, meaning that you cannot finance a vehicle of a certain age. Other lenders do not offering financing for luxury or limited edition vehicles. Such vehicles do not tend to lose value quickly, but few people can afford these vehicles so if you default on the debt the lender may struggle to find a buyer.
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