Most Common Reasons Car Financing is Denied

Posted by: Derrick    Tags:  , ,    |  No comment
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Getting approved for car financing is easy for some people, but other people may find the process very frustrating. There are a number of reasons that a person could be denied. Most of these reasons are related to the applicant’s credit. Having credit problems does not always prevent an applicant from being approved, it just means they have to put more effort into getting approved.

An applicant’s credit score or FICO score is a number between 300 and 850 used to determine credit worthiness and potential risk for lenders. The applicant’s credit history is used to calculate this score. Since the recent downturn of the economy in the United States, many lenders require a FICO score of at least 600 to approve car loans. This score is affected by such factors as how long the applicant’s credit history is, the type of credit he or she has, how much debt is owed, whether he or she has recently applied for any credit, and most of all by how well he or she has paid their debts since the credit history began.

There are lots of people with what may be considered bad credit. Bad credit can include not paying bills on time or too much debt among other things. Lenders do not want to finance a loan that they don’t feel can be repaid. People who have a less than perfect credit history can try to pay off as many bills as they can before reapplying for a loan to reduce the amount of debt they have. They can also apply for financing with a dealership or loan company who offers loan programs for people in this type of situation.

People with no credit are in a similar situation to those with bad credit because they don’t have a history of using credit and paying their bills on time to prove to the lender that they are a good candidate for a loan. They can try to establish a credit history by obtaining one or two credit cards and using the credit wisely while paying the payments on time. Sometimes getting another person with a good credit rating to be a co-applicant on the loan will result in the loan being approved at a much better interest rate than the person would get on his or her own.

In the loan approval process, lenders look at an applicant’s debt-to-income ratio to determine whether he or she would be a bad risk on a loan. Many lenders do not want the total amount of debt an applicant has to be more than 40% of their income. Any more than this is too much of a risk to take. This is another good reason for people to try to pay off as much of their current debt as possible before attempting to get financing for a vehicle.

If an applicant has any bills in their credit history that were sent to a collection agency due to the person not paying them, the lender will view this negatively. To the lender this looks like the applicant cannot be trusted to pay what he or she owes, so their application for financing will be denied.

Employment history is another big factor in the decision of whether to approve or deny a car loan. Changing jobs often or even changing residences signals to the lender that there is instability in the applicant’s life. The lender would not feel confident in the applicant’s ability to make consistent, timely payments on the loan, so they would not approve the financing. Any person interested in applying for a car loan should make the best effort to keep the same job and residence for at least two to three years before beginning the application process.

Sometimes an insufficient amount of information on a loan application can result in the denial of financing. Failure to provide all the paperwork that is needed by the lender as proof of the information on the loan will result in the application not being approved. Everything on the application must be verifiable or the application cannot be approved.

It is important for anyone wanting a new car to check their credit report from each of the credit reporting agencies carefully before applying for financing. Errors on a credit report can include debt that doesn’t even belong to the applicant. It is best that the applicant find out about any errors before a lender does. Any discrepancies should be cleared up with the credit reporting agencies before trying to obtain a loan. The applicant should find out what his or her credit score is before starting the loan process as well. Credit scores are not included with credit reports and must be obtained separately.

Credit requirements for obtaining car financing may be a little higher in today’s economy, but people looking to buy a new car should not feel that there is no way for them to get approval or give up on the idea altogether, they just have to work a little harder to get what they want.