Purchasing a car is a significant investment and securing finance is often an essential part of the process. Having your car loan application denied can therefore be a major setback. In this blog, we'll discuss the common reasons for rejection and what you can do about it.

Check your paperwork

Ensure all information provided in your application is accurate, complete and up to date. Missing information or inconsistencies can raise red flags for lenders and is one of the most common reasons for application denial. Lenders rely heavily on the documentation you provide to assess your financial situation and creditworthiness. Incomplete or incorrect paperwork can delay the process, or worse, lead to a rejection. Here's what you need to be mindful of:

• Gather all required documents: this typically includes proof of identity, income and residency, as well as any additional documents requested by the lender.
• Ensure accuracy: double-check all information entered in the application form for typos or errors, including income figures, addresses and vehicle details. Discrepancies can raise doubts about your financial stability and trustworthiness.
• Organise your documents: clearly label and present all required documents in a neat and organised manner for easy review by the lender. This saves them time and demonstrates your attention to detail.

By being thorough and meticulous with your paperwork, you can avoid unnecessary delays and increase your chances of a smooth loan approval process.

Other reasons for rejection

Even if your documentation is in order, there are a number of other reasons your car loan application may be denied. This includes:

• Income: your income plays a significant role in a lender’s decision to offer formal approval. They will consider how much you earn and your financial obligations to determine if your income level is sufficient to support the car loan payment.
• Insufficient credit history: without a credit history demonstrating responsible borrowing and repayment behaviour, lenders might consider you a high-risk borrower and deny your application. A credit history includes current and previous loans for the past five years, past and present employers and any defaults or overdue accounts. 
• Low credit score: a low credit score indicates a higher risk of missed or late payments, making lenders hesitant to approve your loan.
• High debt-to-income ratio (DTI): your DTI ratio compares your monthly debt payments to your gross monthly income. A high DTI indicates a significant portion of your income goes towards existing debts, leaving less room for additional loan repayments. This raises concerns about your ability to manage another loan payment.
• Employment status: lenders prefer borrowers with stable and consistent employment income. Being unemployed, underemployed or having a short employment history can negatively impact your application.
• Negative credit events: delinquencies, defaults, repossessions or bankruptcies on past loans or credit cards can significantly impact your credit score and negatively affect your loan application.

Additional factors to consider

If you are considering applying for a car loan, also take into account the following factors:

• Loan amount: the loan amount you request directly impacts your eligibility. A larger loan amount might be challenging to secure if your financial situation doesn't support it.
• Down payment: a larger down payment demonstrates financial commitment and reduces the lender's risk. It can improve your chances of getting approved and potentially qualify you for better loan terms.
• Co-signer: having a co-signer with a strong credit score and stable income can strengthen your application and improve your chances of approval. However, be aware of the potential risks and responsibilities involved in involving a co-signer. Alternatively, you may be able to use a guarantor.

What to do after a denial

After your loan application is denied, it's important to take action. Here's what you can do next to improve your chances of getting approved in the future.

• Understand the reason for denial: contact the lender and inquire about the specific reason for your application's rejection. This knowledge allows you to address the concerns and improve your chances in the future.
• Obtain your credit report: request a copy of your credit report from one of the major credit reporting agencies (in Australia, these are Equifax, Experian and illion) to review for any errors or inaccuracies. If you find errors, dispute them.
• Improve your credit score: take steps to improve your credit score, such as paying bills on time, reducing your debt-to-income ratio and utilising your credit responsibly.
• Reassess your needs and budget: realistically evaluate your current financial situation and car needs. Consider a lower loan amount, a more affordable car or delaying your purchase until your financial situation improves.

More tips for finding a car loan

When seeking car finance, it's essential to explore all your options. Here are some additional tips to consider when looking for the right car loan:

• Shop around for different lenders: compare loan rates and terms from various lenders before applying. This can help you secure the best possible deal and improve your chances of approval.
• Be transparent and honest: when applying for a loan, be upfront and honest about your financial situation. Trying to hide information can lead to further problems down the line.
• Look for pre-approval: getting pre-approved for a car loan can give you a better idea of how much you can afford to spend and streamline the buying process.

Bill Tsouvalas, Managing Director of Savvy, said: