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If you were recently denied an auto refinance loan, you’re not out of options.
Risk is hard to assess. Why? Because every person’s financial profile is unique. Sometimes, applicants just barely miss the cut for an auto refinance loan. Other times, there’s some room for improvement.
We know rejection isn’t fun, and we promise it isn’t personal. Fortunately, you’re not out of options. Before we discuss potential solutions, let’s walk through the reasons why you were not approved for car loan refinancing.
There are several factors that go into a car refinance loan application review. The most commonly referenced factor is credit, but a good credit score doesn’t guarantee an approval — nor does a bad credit score guarantee a denial. Your entire financial profile is considered, including the current condition of your vehicle.
Here are five areas of your application that may have led to a rejection.
Your credit score and credit history are key components of any loan application. That also holds true for an auto refinance loan. If a loan applicant has a history of late payments — or simply doesn’t have much credit history at all — they likely don’t have the best credit score. As a result, they’ll get flagged as being higher risk when they apply for a loan.
Most lenders rely on your FICO Score, which is divided into several ranges:
Again, there isn’t a universal score that guarantees auto loan approval, but if your score is below 670, that may have been the reason your application wasn’t approved. That said, some lenders will work with customers with scores as low as 510. Your credit score isn’t a make or break situation. Lenders also consider your vehicle, income, existing loan, etc.
If you’re unsure what your credit score is, sites like Experian, Equifax, and TransUnion allow you to check your credit report for free.
We have an emotional attachment to our vehicles. However, as much as we personally value our cars, that doesn’t necessarily mean they’re in sufficient condition or worth enough to get a refinance loan.
Vehicle value is important to lenders. In the event a borrower can’t repay their auto loan, the lender has to rely on selling the vehicle to recover their funds. As a result, lenders typically have specific criteria that a vehicle must meet before they’ll issue a refinance loan.
For instance, lenders consider your vehicle’s mileage, model year, and intended purpose. If your car has more than 125,000 miles or is more than 12 years old, lenders may not want to refinance your vehicle. Or, if you use your vehicle for commercial purposes, including ridesharing, you may not be eligible for refinancing.
Your car’s model year may also impact what term length you are eligible for too. An older model likely won’t get a 60-month loan since there is a chance the vehicle won’t last that long.
While lenders prefer newer cars over old used cars, age isn’t necessarily what your lender assesses. They’re more concerned with your loan-to-value ratio (LTV), which is the balance of the loan relative to the value of the car, expressed as a percentage. For example, if you have a $10,000 loan and your vehicle is worth $10,000, your LTV is 100%.
As cars age, they depreciate, which affects your LTV. That’s why older model years are often less appealing to lenders.
RateGenius reviewed auto refinance loan applications from 2015 to 2019 and found that 90% of approved applicants had an LTV of 123% or lower. So, if your LTV is hovering above 123%, that may be the reason you weren’t extended a refinance loan.
As you can imagine, income contributes to a person’s credit-worthiness. Lenders want to see that you’re financially stable, so they’ll ask for proof of income. This could be a W-2, pay stubs, or, if you’re self-employed, 1099s. If you don’t have a job or don’t make enough money to cover loan payments, you’ll have a hard time getting a loan.
When reviewing applications, lenders assess each applicant’s debt-to-income ratio (DTI). Your DTI is the ratio of your monthly debt payments to your gross monthly income. To put it another way, DTI quantifies how much of your monthly income is restricted or obligated to someone else.
A high ratio indicates that the applicant is experiencing financial struggles, while a low ratio suggests plenty of capacity to take on more debt.
So, if you recently took out a mortgage or student loans, your DTI will reflect a bump in monthly debt payments. Or, if you were impacted by the economic fallout of the coronavirus pandemic and lost your primary source of income, your DTI likely significantly increased.
Some debt is okay. In fact, the typical American has $137,000 of outstanding household debt. Simply having debt won’t prevent you from getting approved for more. However, if your DTI is above 50%, traditional lenders, such as banks and credit unions, will hesitate to issue you more debt.
Some applicants get tripped up by car title issues. This can happen when borrowers knowingly or unknowingly have liens on their car.
A lien is someone’s legal right to an asset. When you take out an auto loan to purchase a car, the lender places a lien on said vehicle. This is known as a voluntary lien — one that you acknowledge and agree to. However, if there’s an involuntary lien attached to your vehicle, your title could reflect a cloudy ownership situation.
For example, if you have outstanding speeding tickets or overdue taxes, you might have an involuntary lien placed on your vehicle. Until that involuntary lien is removed, you won’t be able to receive another auto loan from a traditional lender.
One loan rejection shouldn’t discourage you from seeking a refinance. That said, you shouldn’t blindly apply for a bunch of loans either. First, determine why you weren’t approved. Depending on the reason, you can take one of the following approaches to increase your chances next time.
While that sounds easier said than done, there are several ways you can improve your score.
First, you should always make on-time payments. Late payments stay on your credit report for seven years. If you happen to miss a due date, you have 30 days to make the payment before it impacts your credit score. Otherwise, your creditor will alert credit bureaus and your score will drop.
Aside from timely payments, paying down your credit card debt should also increase your score. Why? Because your outstanding credit card balances represent 30% of your credit score.
Aim to keep your credit utilization ratio — which is the ratio of revolving credit you’re using to your total available revolving credit — below 30%.
If you applied for too many auto loans over a certain time period, you may have unintentionally dinged your score. Each time you apply for a loan, the lender runs a credit check, which is also known as a hard credit inquiry. Too many hard credit inquiries can adversely impact your credit score.
That’s why it’s important to understand the ins and outs of rate shopping before you apply for an auto loan.
If your car loan was denied because you have a high outstanding debt balance, you’re not out of luck. Lowering your LTV and DTI could increase the strength of your application. The most straightforward way to lower these ratios is to pay down your existing car loan principal. This requires a commitment to budgeting and saving.
If your schedule allows it, you could pick up a part-time job to improve your monthly income and savings. By earning more money, you’ll not only be able to pay down debt faster but also demonstrate a more stable and sufficient income, which lenders prefer to see.
First, you’ll need to check if there are any existing liens on your vehicle. Certain state transportation agency websites enable you to search for liens, so long as you have your car’s vehicle identification number (VIN) readily available. You can also review vehicle history reports to see a car’s title history.
If you find that there is a lien on your vehicle, you’ll need to resolve that issue before a lender can refinance your existing car loan.
No one likes to be rejected, but it doesn’t mean you’re out of options. If you follow the above recommendations and commit to improving your financial profile, you’ll not only have a better chance of getting approved next time but also increase your odds of getting the best auto refinance loan terms and interest rate.
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