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Three reasons why your car loan was probably rejected

Vidhu Bajaj avatar
Vidhu Bajaj
- 10 min read
Three reasons why your car loan was probably rejected

Having your car loan rejected can be frustrating, especially when lenders are not transparent about why you were unsuccessful. But receiving a car loan rejection doesn't necessarily mean you can't get financing for your new vehicle. Instead, it may be an opportunity to review your financial position and improve it.

Reasons why car loans are commonly rejected

Understanding why your car loan was rejected can help you improve this area and hopefully get approved in future. You could ask your lender the reason behind the rejection, but lenders are sometimes cautious about how much detail they reveal regarding a loan rejection. Fortunately, there are only a handful of reasons why car loans are generally rejected, and understanding these reasons could help you determine where your car loan application was lacking.

1. Errors on your credit application or filing insufficient documentation

Your car loan application can be rejected if you don't fill out all sections of the application correctly. Lenders have stringent mechanisms in place to verify your personal and financial details. If you try to hide anything, they are likely to find out. For instance, if you forget to mention a credit card you own but no longer use (or intentionally omit it), you risk having your credit application rejected due to incomplete information provided.

In some cases, lenders may ask for additional information when assessing your loan application. It's considered best to promptly provide the information (or any documents requested by the lender) to keep the application process moving smoothly. Delaying the process could get your application derailed simply due to a lack of information or incomplete documentation.

2. A low credit score

Your credit score is a reflection of your credit history, and lenders use it to decide whether they should approve your loan or not. A low score indicates to a lender that you may struggle to repay a potential debt, leading them to reject your application to avoid taking on unnecessary risk.

Checking your credit score before applying for a car loan or any other form of credit could help you reduce your chances of rejection due to poor or insufficient credit history. You can check your credit score online with any of the three credit reporting bureaus in Australia (Experian, Equifax, and illion). You may notice some variation in your credit score assigned by each agency, but a numeric score of 725 or above is generally considered good across all three.

If you find your credit score to be low, it could help to wait it out before filing another credit application and take some steps to improve your credit score in the meanwhile.

3. Your financial situation

When you apply for a car loan, a lender will evaluate your financial situation to determine whether you have the means to comfortably repay the loan. This typically involves a thorough assessment of your income and expenses, including your ongoing debt commitments.

Income

When applying for a car loan, lenders assess your financial situation, particularly your income, to gauge your ability to meet loan repayments. For this purpose, you are generally required to submit your past few months' payslips that show consistent earnings and stable employment.

If you are self-employed, it's unlikely you have payslips or even earn a regular income, which can make it challenging to qualify for a car loan. Some lenders offer low doc car loans to such borrowers, but the interest rate may be higher to help offset the higher risk the lender is willing to take.

Expenses

In addition to your income, a lender will also check your expenses, such as your ongoing debts and regular household expenditure, to ascertain whether you can comfortably afford your car loan repayments.

In case your household expenses and ongoing loan commitments take up a significant percentage of your income, it may not leave much for you to make the repayments on your car loan. This could put you at a higher risk of defaulting on your repayments, especially if the interest rates were to rise, and a lender may not be willing to take on unnecessary risk by lending you money.

Outstanding debts

Outstanding debts, such as unpaid credit card bills or existing personal loans, could affect your car loan application. Lenders consider your ongoing debts when assessing your ability to repay a loan. If they find a substantial portion of your income goes towards servicing your current debts, it could raise a red flag, as you might not have enough funds to handle car loan repayments on top of your other debt obligations.

Finding ways to reduce your household expenses and reducing your debts may help improve your chances of getting approved for a car loan. This may mean ditching takeaway meals or resisting the urge to splurge on online shopping for a few weeks. Alternatively, if you already have one or more debts, such as an outstanding credit card bill or personal loan, you may want to consider repaying this before applying again.

What are my options if my car loan is rejected?

Having your car loan rejected isn't the end of the road. While you may feel disappointed or even frustrated, take some time to find out why your application was denied and work on it to increase your chances of approval the next time.

If you are not sure about what led to your application getting declined and the lender isn’t forthcoming with an explanation, you may want to discuss your situation with a car loan broker to understand your available options.

It's also important to understand a lender's loan eligibility criteria before making any credit application. For instance, you may be purchasing a vehicle for business use, but the loan is only for personal use. Or, you may want to buy a used car, but you applied for a new car loan or one that doesn't allow you to purchase a car as old as the one you selected. Reading the Product Disclosure Statement (PDS) for a loan can help you understand a lender's eligibility criteria better so you can apply with a lender who's more likely to approve your loan application. 

A lender could also decline your application if they consider you a high-risk borrower. This could be the case if you have a thin credit history, you’re self-employed, or you’ve had bad credit in the past. However, if you have the financial means to repay the loan, you could increase your chances of approval by considering options that reduce the lender’s risk in loaning you money.

For example, you could consider applying for a secured car loan that uses the car itself as a security for the loan. This decreases the risk for lenders and may increase your chances of approval if you can show adequate income to cover your loan repayments. It may also help to pay an upfront deposit towards the car’s purchase price, which could reduce your loan-to-value ratio. As lenders consider low LVR loans to be less of a risk than those with high LVRs, a deposit could potentially help increase your chances of approval.

How to reduce your chances of getting rejected for a car loan?

While there are plenty of reasons why a lender may reject your car loan application, there are certain steps you can take to increase your chances of getting approved for a loan. Here are some practical tips that could increase the likelihood of your car loan application succeeding.

Check your credit score

Checking your credit score is probably one of the most crucial steps before applying for any kind of credit product. Your credit score reflects your history of borrowing and repaying money. If you’ve been financially disciplined, you’re likely to have a good credit score. But if you’ve defaulted or missed repayments in the past, your credit score may be low.

By reviewing your credit score, lenders can get a fair idea of the risk involved in loaning you money. The higher your credit score, the better are your chances of getting approved for a loan and potentially securing a competitive interest rate.

You can check your credit score for free to have an idea of how a lender will view your application for a car loan or any other credit product. If your score is lower than you expected, you may consider taking steps to improve your credit score before applying for a car loan. Alternatively, you may consider applying for a car loan with a guarantor to increase your chances of approval.

Have a reasonable budget

If you’re seeking finance for a car, don't assume you'll get approved for any amount you want. Owning a car involves several expenses besides its price tag. You’ll need to pay for things like stamp duty, insurance, registration, and ongoing fuel and maintenance costs. 

To avoid financial strain, it’s essential to consider these extra expenses and determine a reasonable budget for your next set of wheels. You could use a car loan calculator to figure out manageable monthly repayments based on various loan sizes. This way, you can establish a practical budget that aligns with your financial situation.

Check the eligibility criteria before applying

Before applying for a car loan, make sure you’ve checked and meet the lender’s eligibility criteria. Failing to meet these requirements, such as a minimum income or credit score, may result in your application getting rejected.

If you don’t meet a particular lender’s specific requirements for credit, the simplest solution could be seeking out another lender whose criteria you do meet to increase your chances of approval.

Get pre-approved for a car loan

Getting pre-approved for a loan is optional but it might be helpful for some people. Car loan pre-approval involves a lender assessing your financial details and tentatively agreeing to loan you a specific amount for your purchase. As the loan is tentative, or conditional in nature, neither you or the lender are bound by it.

You may choose not to go ahead with final approval if you happen to change your mind, and the lender may decide not to finally approve you for the loan if they feel you can no longer meet the repayments or the car you choose doesn’t match their criteria. The good part is that the lender assesses your financial situation before pre-approving you, which could be an indication of whether you’d be approved, even though it’s in no way a guarantee.

Getting pre-approved for a car loan could give you a practical spending limit, helping you focus on options within your budget. Moreover, a pre-approval could enhance your bargaining power when negotiating the car’s price, as sellers often see pre-approved buyers as committed shoppers.

Compare your options

With numerous car loan products on the market, it's essential to compare your options to pinpoint the one that best suits your specific needs. Look beyond the car loan rates and consider factors such as lender fees and additional features to find a deal that aligns with your financial situation and future goals.

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Product database updated 25 Jun, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.