I Was Denied an Auto Loan. Now What?

Bright sunshine shines in the windshield of a car as a person with a backwards baseball cap drives with one hand on the steering wheel.

You’re in the market for a new car but you’ve been denied an auto loan. Now what? Here’s what you need to know about why you may have been denied and what to do to make sure it doesn’t happen again.

Why Do I Keep Getting Denied for Auto Loans?

Unfortunately, there are many reasons a bank might reject your application for a car loan. If your loan application has recently been denied or you keep getting denied, it might be due to one of these common reasons:

  • Application errors. Sometimes, the application could be rejected because of an error you made when filling it out. A missed section, some incorrect information, a missing form or another mistake can mean your loan is ultimately denied.
  • Bad credit. Bad credit is a common reason for auto loan denial. A score below 670 is usually considered a bad credit score, and this damages lenders’ trust in your ability to pay off a loan.
  • Too much debt. A high debt-to-income ratio can make lenders leery. If you have a number of loans or credit cards with large amounts of debt, this raises your DTI and may lower your chance of getting approved for future loans, car loans included.
  • No credit. Lenders look for proof of consistency in paying off past loans when reviewing your application. If you have no credit history, lenders may feel they don’t have enough information about your ability to pay off a future loan.

What Can I Do If My Loan Application Is Denied?

You have a few options when you’ve been denied an auto loan, depending on the reason you were rejected.

Application Error

If you were rejected because of an application error on your part, you should contact the bank as soon as you can. Hopefully, the mix-up can be resolved and your request will be approved. If not, the lender will tell you when you can reapply.

Poor Credit

If you were rejected because of poor credit, check your credit report so you can determine what is negatively impacting your score. Depending on what your report says, look into ways to improve your credit so you can be approved next time. Pay your bills on time, and use your credit cards to make and then repay smaller purchases. Keep in mind that building or rebuilding your credit can take a while. Don’t be disappointed if it takes months or even a year or two to really get your score where you want it.

If you need a loan sooner, consider adding a cosigner to your application that can be your backup if you fail to pay the loan. Lenders feel more comfortable with this method, and it’s a good way to prove dependability.

Debt

If you were rejected because you already have too much debt, it’s important to reduce that amount in steady increments. Set a budget and stick to it, tackling the largest debts first. Avoid adding any debt to what you already have. Examine your credit card usage for any unnecessary expenses and cut back on those in the future.

No Credit

If you don’t have a credit history, now’s the time to start. There are a lot of ways to start building your credit: you might be able to become an authorized user on someone else’s credit card or find a co-signer for your loan, for example. You also might want to apply for a secured credit card or credit card for no credit.

Find the right credit card for your needs. Learn more.

Does Getting Denied a Loan Hurt My Credit?

Getting denied for an auto loan doesn’t in itself hurt your credit score. The lender didn’t extend anything, so there’s nothing that can hurt your score. However, multiple denied applications at once could hurt your score.

A bank conducts a “hard inquiry” when you apply for a loan. This can cause a drop in your credit score slightly—about five to ten points—whether you’re accepted or not. If you apply for too many loans, numerous hard inquiries on your credit can cause a larger drop.

What Are My Other Options?

If you don’t have time to build or rebuild your credit, can’t get a co-signer, and need a car fast, there are two options to be considered as a last resort.

“Buy Here Pay Here” Dealers

Stop by your neighborhood “Buy Here Pay Here” (BHPH) auto dealer, and one way or another, it will probably get you into a car. It won’t be a new car, and it will probably have lots of miles on it, but at least you’ll get a car you desperately need to get you to and fro.

The BHPH dealer won’t want to talk to you about interest rates. Your local BHPH will focus on your expected monthly payment and ask for a really big down payment. They mostly care about whether or not you have a current, steady income. Based on that, they’ll determine how much they are willing to lend and which car options are available to you. It’s not a great way to buy a car, but for millions of Americans, it is the only way they can make this significant a purchase.

Unfortunately, purchasing a car at a BHPH dealer isn’t a credit boost at all. They usually don’t report anything positive to credit reporting agencies, but they will report negative actions like a missed payment or repossession. Always ask about their late payment policies before making a decision.

Alternative Credit Bureaus

If your credit score is low or your credit history is light based on traditional credit trade lines (credit cards and loans), but you have a solid history of paying your everyday bills, you may be able to take advantage of alternative credit scoring methods. If you can prove your creditworthiness by having your everyday bills verified, some companies will work with alternative credit scoring methods to offer credit. Alternative credit generally doesn’t carry the same weight as traditional credit lines, so interest rates likely will not be as competitive.

At this point, you can go to any dealer and buy the car you really want instead of being limited to the inventory on a BHPH lot. If you can afford the payments, you can buy a new car that’s under warranty and has no mileage on the odometer. If you can continue to work on your credit and improve your credit score, refinancing may even be available down the road.

However, many lenders still do not use alternative credit and don’t view it as proof of reliability. Most of these alternative credit companies also don’t report your findings to the major credit bureaus. So, while these alternative creditors may be a short-term option, building credit through traditional methods should be a priority.

Why Would I Get Rejected for a Car Refinance?

If you were denied for refinancing, it’s probably because of a poor credit score or a high DTI. Usually, these are the same as the reasons you might be denied an auto loan. Your score may have been satisfactory when you purchased the vehicle but taken a few hits since its purchase.

How to Get Approved Next Time

Before you reapply for an auto loan, make sure all your information is in order. Gather your records and make sure everything is ironed out and correct before you go to a lender. For a better shot at loan approval, your credit score should be in a comfortable range, and you shouldn’t have any large outstanding debts. Always check your credit score before you apply. If it’s not high enough for loan approval, work to improve your credit first. Then, make sure you’ve determined what type of payments and interest you can afford.

If you do get denied, don’t worry! By making sure you meet all of the income, credit and debt requirements for an auto loan, you can increase your chance of getting accepted the next time you apply.

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3 Simple Steps to Leasing a Car

Not sure how to lease a car? We’ll walk you through the three key steps.

Shopping for a car is overwhelming. Not only must we choose between new or used, decide on a make and model, and sort through safety features and trim packages, but then we need to decide how to pay for it. If you’ve got the cash to pay for your car in full up front, it can be a smart financial move to do so, thereby avoiding interest expenses and higher insurance prices (we’ll get to that). But, most of us end up choosing between financing and leasing a new car. So, how to know what’s best? We’ll walk you through the three key steps.

1. Determine if Leasing Is for You

For some, the choice is simple: If you want to own, then you’ll choose financing. If you’re hesitant to commit to a vehicle for more than a few years, you’ll choose to lease. But if you just want make the best financial choice, you should probably consider a few different factors mentioned in The Zebra’s “Should You Buy, Finance or Lease Your New Car?” post:

Finance if you:

  • Plan to drive more than 12,000 to 15,000 miles per year (the cap for most leases, after which you’ll be subject to sometimes exorbitant fees)
  • Tend to be tough on your car or you don’t want to worry about strictly maintaining it
  • Want to make an investment and have something to trade in or resell

Lease if you:

  • Like to have a new car every three to four years
  • Like to be under a manufacturer’s warranty
  • Have traded in a vehicle previously before your loan was up
  • Want a lower down payment, lower monthly payments, and lower repair costs (because you’ll be under warranty)

David Bakke, personal finance expert at Money Crashers, offers his advice on what to ask yourself before leasing:

  • How long you’ll have to make payments: most leases are between two and four years, so you’ll be responsible for the monthly payments for between 24 and 48 months
  • How much you’ll drive: if it’s above the mileage cap, leasing might not be a smart financial decision
  • Your credit score: It not only affects your insurance rate, but also plays a role in your ability to qualify for a lease and a good interest rate. (Not sure where you stand? You can view two of your scores for free, updated very 14 days, on Credit.com.)
  • Whether you want to purchase when the lease is up: If you might, find out if whoever you’re leasing from offers the option because it isn’t necessarily standard
  • Penalties for ending the lease term early
  • Whether or not the lease is transferable
  • The warranty terms of your lease

Leasing is a commitment, and terms vary from place to place, so be sure you know what you want from the experience.

2. Lock Down Your Lease Financing Details

You can finance your lease through the dealership or through a bank or credit union, and you should compare prices for a few different options because rates will vary.

If you’ve never leased before, figuring out what constitutes a good price can seem alien, but the general formula is actually fairly straightforward. According to Edmunds, the amount you pay will involves:

  • The total price of the vehicle, which you can and should negotiate
  • The money factor (which is the interest rate on which your lease is based and is also sometimes called a lease factor or a lease fee) – you can get this number from the dealership or your credit union (depending on how you’re financing your lease)
  • The lease term
  • The residual value of the car, which is, essentially, how much of the car’s value will be left once you “use up” a percentage of it while leasing – it is usually between 40% and 65% of the total value for a 36-month lease
  • Taxes, fees, the down payment, your trade-in (not required, of course), and dealer incentives and rebates

Edmunds has an excellent lease price calculator, though they’re careful to note that you won’t be able to calculate a potential lease down to the last nickel before actually speaking with a few dealers since there are so many pricing, tax and fee variables involved (detailed in the following sections).

It’s better to pay for a down payment with your own funds, rather than borrow. “Contrary to when you buy a car, you do not want to make a significant down payment on a leased car,” Bakke explains, because if the vehicle is stolen or totaled at the beginning of your lease, you won’t recover any of that down payment. Most experts recommend a down payment of $2,000 or under.

Know What the Typical Upfront Leasing Fees Are:

The following fees are usually, though not universally, associated with leasing a car in the U.S., says Bakke. When shopping for a lease, be sure to get a list of all fees so you can accurately calculate your total expected costs:

  • Acquisition or bank fee: Charged for the work required to create the lease (usually about $500)
  • Security deposit: Usually equal to one monthly payment and returned in full at the end of lease as long as the car is in good condition
  • Disposition fee: Covers the cost of cleaning and reselling the vehicle (usually about $300)
  • Title, tag, license, and registration fees: Just like if you were buying the car (prices vary by state)
  • Documentation fee (“doc fee”): An administrative fee (usually about $500, but can vary between $50 and $700 or occasionally be negotiated down)
  • Taxes: Vary by state, but you should only responsible for taxes on the portion you lease

End-of-Lease Fees:

  • Vehicle inspection: You’ll be charged for any necessary repairs
  • Exceeding mileage: If you go over the mileage cap, you could be in for a big expense; penalty rates vary by company, but the worst-case scenario is 25 cents per mile over the cap

Can You Lease a Used Car?

Leasing a used car isn’t especially common, but it’s an option. You might find that you pay lower monthly payments since an older vehicle is likely to be worth less than a new one. However, if you lease used, the car probably won’t be under warranty (one of the major benefits of leasing), so you’d have to pay out of pocket for any repairs or servicing.

3. Know How Insurance Differs for a Lease

Whenever you buy a car, insurance should be a key consideration — after all, it’s the biggest car-related expense after financing the vehicle itself (even in front of gas).

The Zebra’s own licensed insurance agent and adviser Neil Richardson says insurance is typically more expensive on a leased vehicle than if you owned the vehicle outright. Leasing companies and dealerships want to protect their property (which will be theirs again when your lease is up), so they require high levels of insurance coverage.

According to Richardson, when leasing, you usually need to carry:

  • $100K/$300K/$50K (meaning $100,000 per person/$300,000 total bodily injury liability per accident and $50,000 in property damage liability per accident)
  • $500 comprehensive and collision deductibles
  • You might also be required to carry GAP insurance, which would cover the difference between what you owe and what the car is worth in the event of a total loss or a theft.
  • These limits are higher than most state minimums and the optional $1,000 deductibles that many insurers offer to keeps rates lower. The national average yearly premium for this type of coverage is $1,413, per The Zebra’s own State of Auto Insurance Report.

Many major U.S. insurance companies (and some independent ones) will also require you to have the same level of liability coverage for each vehicle in your household, so if you lease, rates on your other household vehicles could go up (but you wouldn’t necessarily have to add comprehensive and collision to other vehicles). In The State of Auto Insurance Report, The Zebra found that the average yearly premium for a policy carrying just the state minimum limits of liability is $529 while the average yearly premium for a policy with 100/300/100 limits of liability, with no comprehensive and collision coverage, is $692 — a $163 difference.

So, if you own a car with a policy covering only your state’s minimum limits of liability and then your household leases another car, will you have to pay an average of $163 more for the policy of the car you own? Richardson says it’s not always that cut and dry: “Drivers are usually given discounts for insuring multiple vehicles and insurance pricing on the vehicles themselves would vary based on year, make and model.”

So, should you lease? We’ve armed you with the details. Now it’s up to you!

Image: SIphotography

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Source: credit.com