Why was my car loan application rejected?

If your application for car finance was denied, it's important to understand why. Sure, you're probably frustrated and curious to know what happened, but rejected loan applications can count as a black mark on your credit history. So before you try to apply again, you should understand how to put yourself in the best position for success.

This means understanding why lenders reject applications, and knowing what you should do if it happens to you.

Why are car loans rejected and what you can do about it?

If your loan is rejected, the first thing to do is to make sure you have completed the application correctly and that it wasn’t turned down on a technicality. Double-check that you:

• Filled out all sections of the application completely;
• Provided sufficient details of your income, identity, employment and loan purpose;
• Completed all sections accurately;
• Met all eligibility requirements, such as minimum income amount and purpose of loan.

You may be able to call the credit card provider to find out more information.

If your loan application was completed correctly and still turned down, it was probably because the lender found red flags in one or more of the criteria outlined below. Lenders look at these criteria to determine whether you’re a high-risk (more likely to default) or a low-risk (more likely to pay it back on time) applicant.

Shocker: lenders generally prefer to do business with low-risk applicants, so this is the group you want to be in.

• Your credit history

Your credit history is a strong indication of how likely you are to pay back or default on a loan. It includes details of events such as your outstanding debts, overdue accounts as well as previous credit enquiries. It will also show whether you've missed repayments or declared bankruptcy. A higher credit score means lower risk for lenders.

• If you haven’t already, check your credit score before applying for any loan.
• Financial events such as defaults, bankruptcies repayments and credit enquiries can stay on your credit file for 2 to 7 years, depending on the event.

• Current income and employment history

One of the main factors lenders consider is your current income and state of employment. If you’re not earning enough to pay back the loan, or you've only just started a new job, or you have a less than stable income or employment situation, then you’re more likely to be classed as a high-risk applicant.

• Self-employed people might not be able to provide all the income documentation and might need to opt for a low doc car loan. These may also be an effective option for borrowers for whom it would be detrimental to provide full income and employment details during their application.
• Applying for a used car loan is likely to give you a higher chance of success than a new car loan if income is an issue.

• Other loans or outstanding debt

If you are currently paying back other loans, or have other forms of debt, including credit card debt, then you’re a higher risk applicant.

• Debt consolidation might be a sensible step to think about. This involves combining several smaller debts into one large debt, simplifying payments and potentially providing a preferable repayment scheme. Setting up a single repayment can come with its own costs, so make sure you look into these before making a decision.

How much should you have applied for?

It's a good idea to check how much you can borrow before you apply, because if you apply for too much they may reject you rather than offer you a lower amount.

How to avoid being rejected for a car loan again

1. Understand what happened. If you have already been rejected for a car loan, call the lender and find out why. This way you can work towards boosting your situation for next time.
2. Check eligibility requirements. Make sure you meet the required minimum income, employment status and have the right documentation to be submitted.
3. Check credit requirements. There are other requirements around your credit, which may just be that you 'must have good credit'. While most lenders won't disclose what that means, a good aim is to have a credit score above 750.
4. Pay off outstanding loans. You will be in a better position if you don't have existing debts you're still paying off. If you need these debts, make sure you're consistently paying them on time.
5. Speak to a lender representative. Before you make a formal application you can contact the customer service team to run through their requirements and ask any questions to get a sense of whether your application will succeed.

Finder survey: How many Australians have had their car loan application rejected

What to do if your car loan is rejected

If your car loan application is rejected, there are three simple steps to take before your next application.

1. Ask why. Lenders will typically explain why your loan was declined if you ask them. This can give you an idea of what to do differently next time, and whether the issue is a problem with your finances, or if it’s just something such as not meeting the age requirements.
2. Work on building your credit profile. Pay off any outstanding debts and be really on top of meeting your repayments. The better credit score you have, the more likely you are to be approved.
3. Wait before you apply again. You can appear as a red flag to lenders if you apply for credit too many times in a row. So leave it a little while to do the above steps before you apply again.

What other options do you have if your car loan application is rejected?

If your car loan application is rejected and you really think you won't be approved if you try again, there are other options for you.

Car leasing

You lease a car personally or through the company where you work. With leasing a car you pick a term that you want the car for and you'll pay monthly costs to use and run the car. Although there are sometimes options to buy the car at the end, that's not always the case. You can use our calculator to work out the costs associated with leasing a car.

If you work for a company that allows salary sacrificing, you might be able to lease a vehicle. You can do this through fully maintained novated leasing, where the costs of insurance and maintenance also comes out of your pre-tax salary. Or you can do this through a non-maintained novated lease.

Car subscriptions

Think Netflix, but for cars. With a car subscription you'll pay a weekly fee which depends on the car you choose and the plan you choose. There are typically no lock-in contracts and you can change the vehicle whenever you like!

Compare car subscriptions against car ownership and car sharing here!

• Does being rejected for a car loan affect your credit score?

  Being rejected for a car loan, as with any loan, does not directly impact your credit score. While the credit enquiry will be listed on your credit report, the outcome itself is not enough to reduce your score. However, if you are rejected and then proceed to apply numerous times for other loans, this will lower your score.

• What can stop you from getting credit on a car?

  Things like having too many outstanding debts, having a poor credit score and not meeting the eligibility requirements reasons you might not be approved for your car loan.

Written by

Elizabeth Barry

Lead Editor

Elizabeth Barry was the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review. See full bio

Elizabeth's expertise

Elizabeth has written 211 Finder guides across topics including:

• Banking
• Personal finance
• Investing