Car Finance Refused
When you find a car you love, it can be frustrating being refused for the car finance you need to buy it. Sometimes the rejection doesn’t come with an explanation so this guide will walk you through some of the reasons why you could’ve been rejected.
- Why is car finance refused?
- Possible reasons why your car finance has been rejected
- How to increase my chances of getting approved for finance if I’ve been rejected before?
Why is car finance refused?
Every time you use credit you leave a trail used by credit reference agencies to collect information about your financial behaviour. Here’s where a lot of people get confused. You use credit on a daily basis even if you don’t use a credit card.
When you sign up for a phone contract, get utility bills under your name or apply for a mortgage you’re committing to all those companies a payment in exchange for their service. These monthly commitments create a credit history that is going to be used by the credit reference agencies to score your payment habits.
You’re likely to have a higher score if you don’t miss any of the payments making it easier to get approved for finance agreements.
You don’t get a low credit score automatically after you miss a payment though. Normally, service providers give you a couple of chances to make the payment before they report you to the agencies. Even when they do, your score doesn’t drop to the lowest possible level because you missed one single payment.
The credit score drops gradually with missed payments, so it’s not the end of the world if you miss just one, but the more you miss, the lower your score gets, and that’s when it starts to really hurt your credit score, which then makes it harder to apply for a loan.
Possible reasons why your application has been rejected
Lenders don’t always tell you the reason why they’ve rejected your loan application. Even though there’s no harm in asking, they might not give you a clear insight as to why they feel you are a risk.
Before you risk getting rejected for a second time, use the list below to assess your personal finances and check if there’s anything you could improve in order to get approved for the loan.
You don’t meet the lender’s criteria
Having a good credit score is a great start when applying for a car finance, but some lenders could have specific criteria they would like you to meet before approving your application. This can vary from lender to lender so make sure you stablish good dialogue with them, and make sure you are able to tick as many requirement boxes as possible before submitting the application.
Poor credit history
As previously discussed, having a low credit score can affect your eligibility to get car finance because you represent a risk to lenders. There are ways of improving the score, but this process is lengthy. Nevertheless, it’s always good to start as soon as possible to avoid headaches in the future.
One of the most important things to start building up the credit score is not missing payments. If you have missed some in the past they can take up to five years to be cleared from your history. So, make sure you don’t miss any more monthly payments, and then it's a case of waiting for your recent history to clear.
If you already have another type of loan you can also represent a risk to lenders. It’ll all depend on your income and if you’ll be able to honour the car finance repayments combined with the other loan and utility bills.
The best thing to do in this situation is to sit down and do the maths to make sure you’re choosing a car you can afford. Applying for an amount above your means will most likely result in rejection. Be realistic and choose wisely.
Younger customers tend to have a harder time getting approved for car finance due to a lack of credit history. If you’ve just turned 18 it won’t be easy for lenders to assess the risk of you not paying the loan on time. This could result in rejection or higher interest rate, if you eventually get accepted.
Having a guarantor will improve your chances of getting approved. A guarantor is someone who will sign a contract saying they are responsible for paying off the loan in case you fail to honour the monthly payments. This lowers the lender’s risk to lend you the money making it easier for them to not see you as much of a risk.
Previous rejections to car finance or other types of loans could raise a red flag. Make sure you’re applying for realistic amounts and give some time between tries. Several applications in a short period of time doesn’t show confidence and will reflect negatively on your credit report, especially if it's a hard check being completed.
If you have been rejected previously, try to understand why, and wait a little while to reapply if you can.
Having the means to make the repayments is crucial for lenders to even consider lending you the money to buy a car. Providing proof that you’re in employment and have a regular income is one of the requirements to apply for a loan.
If you’re unemployed things can get trickier. Lenders won’t want to loan you money if they think you can’t repay them. This doesn’t necessarily mean they’ll reject your application, but you will be required to show that you have the money available to pay them back. This type of situation is looked at on a case-by-case basis.
If you’re self-employed you’ll be asked to provide documents showing your past earnings for a set time (usually three years). If you have recently changed your status to self-employed, you may not have enough income history for them to assess the risk of lending you money. If you’re intending to use the car for work, it could also raise a red flag. That's because if you're using the car to work as, for example, a taxi driver, you'll accrue more mileage than in an average car.
Type of driving licence or licence status
Young drivers may want to get ahead of the game and purchase a car before they’ve passed their driving test. Lenders won’t approve your finance before you have an actual driving licence, rather than a provisional one.
If you’re a UK resident you must hold a British driving licence. If you only hold an EU licence, lenders will most likely reject your application.
Also, it’s important to note that you must be able to drive in the UK before you can apply for a car finance under your own name. If your licence has been suspended, or you’ve been legally banned to drive, for whatever reason, lenders will also reject your application.
You’re financially associated with people with bad credit
If you're financially associated with someone who has a low credit score, it can lower your chances of getting a car finance or any other type of loan.
Separating your finances could be a good start to improve your chances of approval. If you have a joint bank account, it’d be a good idea to get your own for a while, at least until they clean their credit history and get back to the high credit score again.
How to increase my chances of getting approved for finance if I’ve been rejected before?
If you’ve been refused car finance, not all is lost. Even though most lenders use a similar database to search for their applicants’ credit history, each one of them may have different criteria to determine who’s eligible for the loan and who isn’t.
You can search for lenders who are more prone to doing business with people with bad credit score. They usually have more flexible criteria, but it may cost you more in interest.
Learn more about car finance
Lenders use several criteria to assess the risk of approving a loan. If you don’t meet one item of their criteria list doesn’t necessarily mean your application is going to be rejected, but it would be a good idea to try and improve your credit score by using one of the many services available.
Learning about the different types of finance agreements available on the market could also help you apply for the best loan for you and increase the chances of approval. The most popular finance solutions to car purchase are PCP and HP. You can also explore Evans Halshaw Finance articles with tips and advice about car finance agreements.
Frequently Asked Questions
It depends. There are two types of search a lender can use in order to assess the risk you present to them: hard and soft search. If the lender has used hard search too many times in a short period of time, it can harm your credit score. This is because a hard search shows lenders you have applied for credit/ finance agreements so you could be more of a risk for them.