Banks are direct lenders, and one of the most common avenues for borrowers to get an auto loan. Here are some reasons why a bank could deny a car loan – and what you could do to increase your chances of qualifying.
5 Common Auto Loan Denial Reasons
1. Your credit score is too low
A poor credit score is one of the most common reasons for an auto loan denial, with most traditional auto lenders. Banks tend to have high credit score requirements, and typically, you need a credit score above 660 or higher to qualify for a car loan. Your credit score is one of the biggest factors in auto loan eligibility, since it serves to give a lender on how well you’ve maintained your past credit history.
You may be able to increase your approval odds with poor credit by having a cosigner, or by applying with a bank that you have a good, long-standing history with.
2. Income or employment shortcomings
In order to qualify for a car loan, you need to have provable income that’s enough to repay the loan. Your work history may also come into play, and some lenders require that you’ve had the same job for at least six months to a year. Your income must also be proven with computer-generated check stubs, or typically, two to three years of tax returns. Unearned income such as Social Security or alimony is typically proven with award letters and bank statements. If you have income but not the hard proof, then you’re liable to be turned down.
If you just got a new job, or your income is below $1,500 a month, you may struggle to meet the requirements of a bank. If you need more income to qualify for a car loan, then it may be worth considering a co-borrower. If you have a co-borrower on an auto loan, you both are responsible for making the car payments and you both get rights to the vehicle. Most lenders require that co-borrowers are spouses or life partners.
3. You don’t have a permanent address
Most direct lenders require that you have a permanent address. In addition to having a permanent residence, borrowers that have lived in the same area for at least one year tend to have higher approval odds. Borrowers that frequently move or don’t have a permanent address could represent a risk to a lender, and make them wary to approve you.
To prove your residency, you typically need a recent utility bill in your name. Or, a recent bank statement with the address listed. A lender may also require that your driver’s license has your correct address as well.
4. You have too much debt already
While your income and employment history are important, lenders also evaluate how much of your income is available to repay a car loan. If you meet income requirements, but too much of your income is being used to pay other monthly expenses, you may not qualify for vehicle financing.
Typically, lenders require that no more than 45% to 50% of your monthly income is going to be taken up by the vehicle expenses and your other debts. If your income is being tied up with too many other bills, it may be time to choose a more affordable vehicle or cut some unnecessary monthly expenses.
5. Your credit history has big negative marks
While we already talked about credit score being a common reason for being denied a car loan from a bank, your credit history matters too. If you’re in active bankruptcy, had a recent vehicle repossession, or even accounts in collections, it could be a reason for denial.
One of a lender’s biggest concerns is your ability to repay your credit on time. If your track record is spotty, or full of missed/late payments, a bank may question your ability to repay the auto loan on time. To know what’s being reported on your credit reports, visit www.annualcreditreport.com to request your credit reports for free. Right now, you can get free copies of your credit reports every week until April 2022. Review your credit reports and make sure things are being reported correctly, and that there aren’t any mistakes harming your credit history and score.
Need Another Car Loan Solution?
If you’re not sure why you’ve been denied an auto loan from a bank, ask. Lenders are required to let you know why you’ve been denied financing.
Even if you know the reason, it’s not always possible (or reasonable) to repair your credit score overnight, find a cosigner, or simply free up monthly expenses. And negative marks on your credit reports can remain anywhere from seven to 10 years. If you’re in need of a vehicle right now and traditional lending institutions such as banks can’t help, then it may be time to consider a special finance dealership.
Special finance dealerships are signed up with subprime lenders, and these lenders consider more than just your credit score. You don't have to go looking for them on your own, though. At Auto Credit Express, we know where to find the dealerships you need. Fill out our free auto loan request form, and using our nationwide network of dealers, we’ll look for one in your local area.