If your application for a car loan was denied, it’s likely because you applied for more than you could afford or because your credit score wasn’t high enough. But those aren’t the only reasons why car loans get rejected. Take the advice in this article as a great opportunity to review your financial history to see what can be improved.
There are several reasons why your car loan application might have been denied. Let’s take a look at the 4 most common ones.
You might be surprised how many car loan applications are denied based on an error or technicality. You might have been rejected because you didn’t:
Read over your application before submitting it to make sure there is no information missing and that there are no grammatical or spelling errors. Consider having someone else take a look at it too — they might notice mistakes you missed. An example spelling error: “I owe [with an “e”] $20,000 in securities” means the opposite of “I own [with an “n”] $20,000 in securities.” Carefully proofreading your application can ensure you don’t make these kinds of simple mistakes.
In general, car loan providers tend to consider a credit score of 630 to be the minimum cutoff for approval – meaning any score lower than that could get you denied. Your credit score gives car loan lenders a strong indication of how likely you are to either repay or default on a car loan. Your score represents your credit history, which includes details like past bankruptcies, outstanding debts, overdue accounts and previous credit inquiries. A higher credit score means a lower risk for lenders.
The length of your credit history also matters to car loan providers. So your car loan application could be denied if you’ve only had credit in your name for short amount of time before applying.
Check your credit score before applying for a car loan to better understand how much of a risk you will seem to lenders. If your score is too low to qualify, consider taking steps to improve your credit first.
Your income and employment are two of the main factors lenders consider when reviewing your loan. If you’re not earning enough, only just started a new job or have an unstable employment situation, you’re more likely to be considered a high risk, so your car loan application could be denied.
If income is an issue, applying for a used car loan may give you a higher chance of success. If you’re self-employed and can’t provide all the relevant income documents, consider applying with a cosigner or providing supplemental documents like a financial record documented by a CPA (Chartered Public Accountant) or Notices of Assessment from the past couple of tax years. Freelancers might try getting a steady part-time gig on the books to show you have at least a reliable base income.
In addition to your income, lenders like to take a look at your debt-to-income ratio (DTI). If you have a DTI higher than 43%, you may fond yourself with a denied car loan. You can use our DTI calculator to make sure yours isn’t over the line.
Is your DTI over 43%? You might want to consider consolidating your debt before applying for another loan. This involves combining several smaller debts into one large debt, simplifying payments and possibly getting a better interest rate in the process.
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Unfortunately, some dealerships will allow you to purchase a car and drive off the lot even before your car loan has been fully approved. If they later find out that your car loan was denied, you could get a call from the dealership saying you either need to return the car or agree to pay a higher monthly payment in order to keep it. If you find yourself in this situation you may be the victim of “yo-yo financing” (also known as spot delivery scam). In that case, the dealer might claim that it’s already sold or traded in your car, or threaten it will call the police if you don’t return the car immediately.
If this happens to you, the first thing to do is keep your cool. It’s easy to panic and rush into signing a loan contract with a much higher interest rate. That’s what the dealership is hoping you’ll do. Instead, you should carefully review any documents you received looking for words like “conditional sale.” If it the sale was conditional, you can essentially unwind the sale and return the car.
You should also ask for a letter of denial from the financing company the dealer works with. If they can’t provide one, then there’s a good chance that they’re up to something sketchy.
Yo-yo scams are illegal. If you’re a victim, report the dealership to your local police, the Canadian Anti-Fraud Centre (CAFC) and your province’s auto dealer licensing body. You can also contact a lawyer to help get the situation resolved. Below is a list of provincial dealership licensing organizations you can contact:
| Province | Auto Sales Regulatory Body |
|---|---|
| Alberta | Alberta Motor Vehicle Industry Council (AMVIC) |
| British Columbia | Vehicle Sales Authority (VSA) |
| Manitoba | Manitoba Motor Dealers Association (MMDA) – New Car Dealerships Manitoba Used Car Dealers Associatin (MUCDA) – Used Car Dealerships |
| New Brunswick | Department of Public Safety – Motor Vehicle Branch |
| Newfoundland & Labrador | Government of Newfoundland and Labrador |
| Nova Scotia | Government of Nova Scotia |
| Ontario | Ontario Motor Vehicle Industry Council (OMVIC) |
| Prince Edward Island | Government of Prince Edward Island |
| Quebec | Société de l’assurance automobile du Québec (SAAQ) |
| Saskatchewan | Financial and Consumer Affairs Authority of Saskatchewan (FCAA) |
You can typically find out why your car loan application was denied by contacting your lender. If you applied online, you can often find out simply by logging into the account you used to submit your application. Otherwise, reach out over the phone to the customer service department of your lender to find out how to get this information.
In order to avoid being denied for a car loan make sure you meet your lender’s requirements before you apply. If your application is declined, ask the lender the reason. They can inform you of any weak points in your application that you might have missed, and you can take the appropriate steps to resolve these issues for next time.
If there are any nonnegotiable eligibility requirements, such as a minimum income threshold or specific documentation that needs to be submitted, it’s important that you meet these requirements. Otherwise, you’re pretty much guaranteeing a rejection.
If your car loan application is rejected, there are three simple steps to take before you apply again:
Getting denied for a car loan doesn’t have to be the end of your car-buying story. If you’re having trouble getting a car loan because you’re a high-risk applicant, there are other financing options that could potentially get you behind the wheel of your new ride, including:
A loan rejection isn’t the end of the world. It gives you a chance to figure out what you’ve done wrong and improve for next time. Take some time to compare your auto loan options so you can tackle your next application with confidence.
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