What to do if you're denied a car loan

Millions of Americans buy cars every year, and many of those buyers take out auto loans to pay for these purchases. In fact, nearly 80% of new vehicles purchased in the first quarter of 2023 were financed, according to Experian's State of the Automotive Finance Market report.

With the vast majority of new car sales financed, it's clear that access to lending is crucial for many would-be car buyers. But qualifying can sometimes be a challenge, especially if you're shouldering a high amount of debt or if your credit needs improvement.

If you're having a hard time getting approved for an auto loan, don't despair. To help you get behind the wheel, Experian compiled six steps to take if you can't get a car loan.

1. Boost your credit score

If you don't need a new car right away, consider taking time to improve your credit score.

An excellent credit score isn't necessary to get an auto loan, but a FICO Score in at least the "good" range—670 to 739—will give you a better shot at getting good terms on your car loan. Of course, a higher score can do even more to bump up your approval odds and improve the terms you'll receive on the loan.

What can you do to increase your credit score? Among the moves you can make are:

• Reduce credit card balances
• Avoid late payments
• Catch up on past-due accounts
• Avoid new credit applications

It may also be worthwhile to look over your credit report for mistakenly reported late payments or indications of fraud that may be dragging down your credit score. If you find information you believe to be inaccurate, you have the right to dispute it with the appropriate credit reporting agency.

2. Explore your financing options

Some types of car loans may be easier to obtain than others. Here are three options that may work if you're struggling to qualify for a car loan.

Captive financing
Many automakers offer captive financing (in-house financing) through their lending arms. This means you'll make loan payments directly to them rather than to a bank, credit union or other lender.

In some cases, a car loan you obtain from an automaker may be easier to get than other kinds of car loans. Why? Because the automaker really wants to put you behind the wheel of one of its cars, and not a car from one of its competitors.

Dealer-arranged financing
If you go with dealer-arranged financing, a car dealership reaches out to several lenders on your behalf to provide a menu of lending options. You then can choose the option that's best for you. These options may include lenders that are willing to extend credit to applicants with less-than-ideal credit histories.

You're not necessarily guaranteed the best interest rate with dealer-arranged financing, however. Oftentimes, dealers will add a little interest on the top to make finding the loan with their while.

Work with your current bank or credit union
It's likely the financial institution you already work with can originate a loan for a new or used car. Apply for loan preapproval before you head to the dealership so you'll have an idea of your loan terms and the loan amount you may be approved for. Once you find a car you like, you'll provide vehicle information to your bank.

Talk to a customer service agent with your bank to get a better idea of how the process works with your bank or credit union. 
 

3. Consider leasing a car

If your credit needs improvement, leasing a car may be an alternative to an auto loan. Low credit can make it difficult to qualify to lease a car, but credit score requirements vary dealership to dealership.

Keep in mind that if you do qualify, having low credit can limit your leasing options. For instance, you may be restricted to cars within a certain price range, be charged a higher rate of interest and be required to pay a larger down payment. But it's an option worth exploring, as leasing can also mean lower monthly payments and the ability to keep car maintenance and repair costs down.

4. Decrease your debt

While it isn't a quick fix, slashing your debt may put you in a better position to obtain a car loan.

Generally, lenders want a borrower seeking a car loan to have a debt-to-income ratio (DTI) no higher than 46%. Ideally, your DTI should be 35% or less. A DTI that's 50% or higher may signal to lenders that you won't be able to fit a car payment into your budget.

DTI represents your monthly debt payments divided by your monthly gross income. The higher this ratio is, the more risky you appear to a lender. Here's an example of how to calculate DTI.

Let's say your monthly debt obligations are a $1,500 mortgage payment, a $500 car loan payment and $750 in credit card bills. Your monthly debt payments add up to $2,750 ($1,500 + $500 + $750 = $2,750). Your monthly gross income is $6,500.

To come up with your DTI, you divide your monthly debt payments ($2,750) by your monthly gross income ($6,500). The result is 0.42 (2,750/6,500 = 0.42). You then multiply that number by 100 to arrive at a DTI of 42% (0.42 x 100 = 42%).

If your DTI winds up being higher than a lender would like it to be, look at increasing your ratio by:

• Putting more money toward monthly credit card payments
• Steering clear of piling on more debt
• Finding ways to generate more income, such as taking on a side gig

5. Buy a used car

In 2022, the average balance for a car loan stood at $22,612, according to Experian data. For some car buyers, that amount of debt might be a deal breaker when it comes to nailing down a loan. But you may be able to get a loan if you set your sights lower and buy a less expensive car.

For instance, you might shop for a used car instead of a new car. In the first quarter of 2023, the average amount financed for a new car was $40,851 according to Experian's State of the Automotive Finance Market report. By contrast, the average amount financed for a used car was $26,420. In other words, the average new car loan balance is 54% more than the average used car loan balance.

6. Find a cosigner

If you're hitting a dead end in trying to qualify for a car loan, consider asking someone to cosign the loan for you.

Recruiting someone to cosign your loan—a relative with a solid credit record, for instance—gives a lender more confidence that timely loan payments will be made. A cosigner assumes responsibility for making payments or even paying off the loan if you, the primary borrower, end up not upholding your end of the deal. Your credit history and the cosigner's credit history can be tarnished if loan payments are missed.

The bottom line

You may think it's the end of the road for your car-buying journey if you're finding it hard to take out a car loan. However, several options—such as boosting your credit score or recruiting a cosigner—may revive your drive to purchase a car. 

This story was produced by Experian and reviewed and distributed by Stacker Media.