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4 Things That Can Keep You From Getting a Car Loan

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Auto loans might be among the easiest loans to get, but that doesn’t mean there aren’t things that can keep your financing from going through, especially if you’re looking for a really good interest rate.

Richard Hyde, COO with Prestige Financial in Salt Lake City, said the most important thing you can do going into the loan process is be honest, particularly if your credit isn’t ship-shape.

“Lenders understand that consumers run into credit challenges,” he said. “A lender understanding the issues and the situation clearly will help you get the best loan for your circumstance. The cost of a loan for a person with challenged credit is likely to be higher than someone who does not have the same credit challenges, but it is a way to reestablish and improve a credit score which can create additional, less expensive options moving forward.”

Here’s the bottom line: You’re less likely to be turned down for an auto loan because automobiles can be repossessed pretty easily, meaning lenders can recoup their losses should you default. Instead, you’ll probably be offered a less-than-prime interest rate that, in some cases, can run you close to 20%.

If you are turned down for an auto loan, however, it’s probably going to be for one of the following reasons.

1. Repossession

“Previous car payment success is important,” Hyde said. “A recent repossession is generally considered a significant negative piece when a lender is trying to determine a borrower’s likelihood of paying on a new loan. The lender may require a larger down payment, charge a higher interest rate or restrict the amount of money they are willing to lend on a vehicle.”

2. Bankruptcy

Lenders attempt to determine a consumer’s creditworthiness through several channels. A credit score is used in most credit decisions; additionally, income, job stability, residence stability, outstanding debt and other information may be considered. And while a bankruptcy will lower your credit score, making you a less attractive candidate for new credit, there can be an upside, Hyde said.

“A Chapter 7 bankruptcy, upon discharge, generally dissolves any debt that a petitioner may have at the time of filing,” Hyde said. And, while a bankruptcy will generally lower your credit score, it also reduces or eliminates other obligations and can decrease your debt-to-income ratio.

“A lower DTI is viewed as a plus by most lenders,” Hyde said.

3. Incomplete Loan Documents

Another reason lenders might say no to your application is incomplete and/or missing loan documents. To avoid this, make sure you’ve correctly filled out your application, and that you’ve provided proof of income and other required information.

4. No Credit History

Having little to no credit history can make it harder to get financing for your vehicle approved. But if you have no credit and it’s your first time shopping for a car loan, you might qualify for a first-time buyer’s program. Auto finance companies have these programs, though, if you already have a relationship with a bank or credit union, you might get a better rate.

You can also consider getting a co-signer to help you get the loan. But remember, when you ask someone to co-sign a loan, you’re asking them to risk their credit standing in order to help you. If you miss payments, you’ll bring that friend or family member’s credit score down with you.

How to Get an Auto Loan

If you’re worried about being turned down for any of the above reasons, Hyde has three tips to keep in mind.

  1. Before you start shopping, know your credit score. Understanding where your score fits on the credit scale can help you decide on the best loan for you, and can prepare you for the loan answers you might receive. You can check your credit reports for free each year at AnnualCreditReport.com and view your credit scores for free each month at Credit.com.
  2. If you get turned down, don’t give up. It may cost a little more than you’d like to get your loan, but making timely vehicle payments is an excellent way to improve your credit rating for the future.
  3. Once you get the loan, make your payments on time. Being late, especially on a higher interest rate loan is costly and can slow any improvement to your score.

Keep in mind, too, there may be some things you can do to bolster your creditworthiness before shopping for a loan. Checking your credit report for errors and paying down high credit card balances, for instance, could improve your credit score. (You can find more information about how to fix your credit here.)

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