4 Possible Reasons for Car Loan Rejection (With Solutions)
4 Possible Reasons for Car Loan Rejection (With Solutions)
Posted on October 31, 2022
Have you recently applied or are about to apply for a car loan? Are you worried about being denied? This article is for you. We'll go through the 4 most common reasons for car loan rejection and what you can do to combat them in the Toronto area.
1. Low Credit Score
Your credit score is key when lenders are considering the possibility of granting you a loan. If you’re not aware, your credit score is a number that represents your reliability for paying back loans and bills and credit. Generally speaking you want to be at around 660+. That's the range considered good by creditors. A low credit score is the main reason for car loan rejection in Canada.
You can check your credit score by ordering a credit report or you can use a free service like Credit Karma. If you're in that good range, nothing to worry about.
If not, here’s the next step: before applying for the loan take some steps to improve your credit score. One of the easiest ways is to start buying regular things on a credit card, as long as you can afford them and pay them back at the end of the month, that's the important bit.
Either that or you can consider getting a low credit loan but if you do you're going to have to deal with a premium rate.
2. Low/Unstable Income
Lenders want to be sure that you’re able to pay back a loan and so another important thing they’re going to check is your income. If your income is too low to pay back the loan on time, or your job is new/in flux, this is another reason for car loan rejection.
This is the hardest one on the list to fix. Unless you can wait a while for a more stable situation you may need to consider dropping your standards for the kind of car you want to buy. If low income is the issue you can take a smaller loan for a not as good car. If your job is unstable but pays well a cosigner on the loan may still get you approved.
3. Existing Debt
If you have a big pile of unpaid loans and credit already the lender won’t look favourably on you, even if you're paying all of those loans back on time. Specifically they’ll take a look at your DTI (Debt-to-Income) ratio. You can calculate this quite simply to check it yourself before applying.
Simply add up all your monthly loan/credit/other debt payments and divide them by your monthly income. Multiply that number by 100 to get a percentage value.
So if your total monthly payments were $500 a month and your income was $2000
(500/2000) x 100 = 25%
If that number is higher than roughly 40% you’re going to have some issues when applying for a loan. The best way to fix this is just to pay off those loans first. You may be able to consolidate them and pay them off faster.
4. Application Errors
Believe it or not, but errors on the application are the most common reason for loan rejections. Make sure your application is properly completed before submitting it, triple check! It’s important.
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