What to do if a car loan is turned down

Every year, millions of Americans buy cars, and many of them get auto loans to pay for them. But not everyone who wants to buy a car can easily get a loan for one. Maybe their credit score is too low or they have too much debt.

But don’t give up hope if you’re having trouble getting a car loan. Here are five things you can do to make your chances of succeeding better.

1. Improve your credit rating

If you don’t need a new car right away, you might want to work on your credit score first.

You don’t need an excellent credit score to get an auto loan, but if your FICO® Score is between 670 and 739, you’ll have a better chance of getting good terms on your loan. 

Of course, a higher score can do even more to improve your chances of getting the loan and make the terms better.

How can you make your credit score better? 

Some of the things you can do are:

  • Reduce credit card balances
  • Avoid late payments
  • Catch up on past-due accounts
  • Avoid new credit applications

You might also want to look over your credit report to see if there are any mistakes or signs of fraud that could be lowering your credit score. 

If you find something on your credit report that you think is wrong, you can dispute it with the right credit reporting agency.

2. Pay off your debts

Cutting your debt isn’t a quick fix, but it may make it easier for you to get a car loan.

Most lenders won’t give a car loan to someone with a debt-to-income ratio (DTI) of more than 46%. 

Your DTI should be 35% or less, if possible. 

If your DTI is 50% or higher, it may tell lenders that you won’t be able to afford a car payment.

DTI is your monthly debt payments as a percentage of your gross monthly income. 

If this ratio is high, you look riskier to a lender. 

Here is a sample of how to figure out DTI.

Let’s say you owe $1,500 on your mortgage, $500 on your car loan, and $750 in credit card bills every month. 

Your total monthly payments are $2,750 ($1,500 + $500 + $750). 

Your gross income each month is $6,500.

Divide your monthly debt payments ($2,750) by your monthly gross income ($6,500) to get your DTI. 

The answer is 0.42, which is 2,750 divided by 6,500. 

Then, you take that number and multiply it by 100 to get a DTI of 42% (0.42 x 100 = 42%).

If your DTI ends up being higher than what a lender wants, you might want to consider:

  • Putting more money toward monthly credit card payments
  • Steering clear of piling on more debt
  • Finding ways to generate more income, such as taking on a side gig

3. Buy a car for less money

According to Experian data, the average car loan balance in 2022 was $22,612. 

Some people who want to buy a car might not be able to get a loan if they have that much debt. 

But you might be able to get a loan if you lower your expectations and buy a car for less money.

You might look for a used car instead of a brand-new one. 

According to Experian’s State of the Automotive Finance Market report, the average loan amount for a new car in the fourth quarter of 2022 was $41,445. 

On the other hand, a used car cost an average of $27,768. 

So, the average loan for a new car was 49% more than the average loan for a used car.

4. Look into how you can pay for it.

There may be some kinds of car loans that are easier to get than others. Here are three things you can try if you’re having trouble getting a car loan.

Captive funding

Through their lending arms, many car companies offer captive financing, which is also called “in-house financing.” This means that you will pay them directly instead of a bank, credit union, or other lender.

In some cases, getting a car loan from the company that makes the car may be easier than getting a loan from somewhere else. Why? Because the car company really wants you to drive one of its cars and not one of its competitors’ cars.

Financing set up by the dealer

If you choose dealer-arranged financing, the car dealership will contact several lenders on your behalf to get a list of loan options for you. Then you can choose the best choice for you. There may be lenders among these options who are willing to give credit to people with less-than-perfect credit histories.

With dealer-arranged financing, however, you are not always guaranteed to get the best interest rate. Most of the time, dealers will add a small amount of interest to the loan to make it worth their while.

Work with the bank or credit union you already have.

Most likely, you can get a loan for a new or used car from the same bank you already use. Apply for preapproval of a loan before you go to the dealership. This will give you an idea of the terms of the loan and how much you might be able to borrow. When you find a car you like, you’ll give your bank details about it.

Talk to a customer service rep at your bank or credit union to find out how the process works there.

5. Look for a cosigner

If you can’t get a car loan on your own, you could ask a friend or family member to cosign the loan for you.

If you get a relative with good credit to cosign your loan, for example, the lender will be more confident that the loan will be paid back on time. 

If you, the main borrower, don’t keep your end of the deal, the cosigner is responsible for making payments or even paying off the loan. 

If you don’t make loan payments on time, it can hurt both your credit history and the credit history of the cosigner.

In conclusion

If you’re having trouble getting a car loan, you might think that there’s no way for you to buy a car. But you might want to buy a car again if you do something like improve your credit score or find a cosigner. Check out the car loan calculator on Experian to find out how much you can spend on a new car.

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