Not getting approved for a car loan can be a frustrating experience which may result in serious feelings of despair or even depression. Getting your application approved is not rocket science, there are a couple of steps you can take that would improve your chances of securing the auto loan that you desire. There are a couple of reasons lenders may turn down an application for an auto loan, this may be because of:
- Applicant’s job status,
- Inability to provide essential documents to lenders such as valid driver’s license or proof of income,
- Errors on credit report, wrong or misleading information on applicant’s auto loan agreement,
- Not having a well-established credit file, possibly because you are new to the country or because you are young and just growing your credit history.
Whatever the reason for the denial, it is important to note that by taking basic, but vital steps, you can improve your chances for approval when next you apply for a loan. These steps would not only help you secure just any loan but one with an affordable payment and favorable interest rate.
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Check your credit score:
The first thing to do is to check your credit score. You can request a free copy of your credit report from the major credit bureaus. Knowing your credit score will prepare you in advance for what to expect before you start applying for auto loans. This understanding will help to minimize the auto financing stress as you get feedback from lenders with regards to rates and terms they are offering.
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Clean up your credit score:
Requesting for your credit report will put you in a good position to catch any errors that the bureau may have made on your account. Regardless of how small or large the error(s) may be, catching and fixing them may increase your credit score tremendously and prove to lenders that you are worth every penny. Some of the most popular errors include wrong accounts, incorrect credit limits, and closed accounts reported as open. The minute you spot any of these errors, call the bureau and bring their attention to it. If however, there are errors on your credit report and your score is less than favorable, it is advisable you shelve your plan for a car for a few months and in that period rebuild your credit score. Otherwise, you may have to pay more monthly in fees and rates if you borrow with a very low score and poor history.
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Balance your debt-to-income ratio:
Your debt-to-income ratio refers to how much you owe over your level of income. When someone has a high debt-to-income ratio, it means he/she has a large debt compared to the amount of income that is coming in. Although not all lenders have a stringent debt-to-income ratio, having a low ratio portrays you as a reliable debtor. Lenders always want to be sure you are capable of repaying your loan, therefore they reason that if too much, say more than 40%, of your income, is spent on revolving credit cards, housing, or another form of a loan, then you may not be worthy for an auto loan. You must, therefore, do what you can to pay down your credit and increase your credit line.
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Provide a substantial down payment:
By coming up with a substantial down payment, you may end up paying a lower interest rate on your loan. After all, lending is all about the balance of risk. The more money you have invested in a car, the less likely you are to default on payment. You should aim for at least a 20% down payment. For someone with weak credit, a substantial down payment will convince lenders that you are serious about your finances.
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Consider adding a consigner:
Some lenders require that people with bad credit provide a consigner before loan approval. Cosigners must meet all financial requirements and must be willing, and able, to pay in the event that you cannot. Although you may not have the intention to default on the loan, you can never predict issues such as job loss, disability, and other factors which may affect your income. Adding a cosigner with strong credit can tremendously improve your chances of approval and secure you a much better interest rate.
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Shop for lenders with the best rates:
Although applying for auto loans from more than one lender may seem stressful and time-consuming, it would be worth it in the long run. There are a couple of places where you can apply for auto financing, but some of these lenders are more likely to offer loans to people who are in the process of repairing and rebuilding their credit. Even if banks turn you down for having a credit score below 700, some credit unions and many in-house financing dealerships may still be willing to work with you. These institutions will be willing to work with you to improve your chances of approval as well as the loan interest rate and terms.
