Let's face it, applying for car finance can be a daunting process, and sometimes the worst does happen and your application is rejected. Getting rejected for car finance is stressful, and ultimately just disappointing that you can't secure that car you've set your sights on! But don't worry. Read on to find out exactly what's going on behind the scenes of car finance decisions, what you can do next, and why you might have been rejected!
Why was I rejected for car finance?
There are several quite common reasons that car finance applications are rejected, and many of today's lenders just use the same, archaic process they've been using for years. With the younger population relying less on credit cards and moving to live in different cities, many people just don't have a credit score for lenders to see.
There needs to be a big change in how car finance affordability is calculated, and Carmoola is doing just that! For now, though, let's get into the nitty-gritty of why your application might have been denied...
Honest Mistakes On Your Form
Yep. It can happen! With many lenders and finance brokers requiring customers to complete loads of forms and manual processes, mistakes can happen. Form filling is not the most exciting of tasks, so don't worry if you got a little distracted... we understand. However, this definitely can have an impact. For example, some incorrect information about your address or date of birth could mean that the finance company isn't able to find you to run a credit check at all, and no credit score can be scarier to lenders than a low score.
New or Unpredictable Work
If you've only just started a new job (maybe you're still on probation) or perhaps you're self-employed, some lenders can see this as just too much of a risk. If they're worried that you can't comfortably pay back the loan, then they may need to decline the application.
The good news on this point is that you could definitely try again in a few months time, where your income stream will appear more predictable and stable. For some lenders, this might even mean you get offered a better deal.
When a lender runs a credit check, they can see your other loan commitments, and so will calculate if your income minus your other commitments give you enough affordability to keep up with the monthly payments.
Lenders are regulated by the Financial Conduct Authority (FCA), and this means they must lend responsibly, to customers who they can see will be able to repay the loan, and not get themselves into financial difficulties.
The good news is that this calculation is something you can easily do at home before you apply! Just take your total monthly income, and deduct all your monthly payment commitments.
Try to consider all your financial commitments such as utility bills, how much you spend on food, rent or mortgage payments, and any other personal loans you might have.
This should leave you with your monthly 'disposable income', and give you a good idea as to what you can afford for your car loan repayments.
Lender Eligibility Criteria
Each lender will set its own eligibility criteria, in order to lend money in the most responsible way possible. Essentially this means that they'll be checking for particular things in your credit file and affordability, in order to make a decision.
We talked about 'disposable income' above. One criterion for a lender might be that you can't commit to payments of more than 50% of the value of your monthly disposable income.
So if your disposable income was £600 per month, then you would be allowed to take a loan where the repayments were no more than £300 per month.
Your Credit History
This one is quite a big factor for many lenders because it shows them how you have behaved with past financial commitments, and it shows up important information such as if you have any CCJs if you're in arrears with other repayments, and previous credit checks.
Some of these factors could be a red flag for a lender, such as an active CCJ, multiple credit checks in a short period of time, or large arrears owed to other companies.
Again, lenders will set the criteria of what they will and will not accept (who is too risky to lend to!), but don't forget that not every lender is the same! Just because you were rejected by one lender, does not mean you'll be rejected by all.
How do car finance applications work?
Many car finance providers were not designed from the ground up, with you in mind. Frustrating as this may sound, it is true in many cases! When these companies began, the regulations were not as strict, or customer-focussed.
In 2014, the FCA took over from the Office of Fair Trading, and placed heavier regulations on finance companies, ensuring they put customers' needs first. Although companies have been forced to adapt, they are too big to re-build their approach, and this means the application process is still pretty old fashioned and can be painful.
When we think about it now, it seems crazy that you can get all the way through the process of finding your ideal car, test driving it, and ultimately getting pretty attached... before the finance application has been started!
I can't think of many other instances where you go all the way through to buying something, without knowing exactly how you'll pay for it. Carmoola is changing that, by enabling you to get approved for finance in advance, and then being able to use your Carmoola card to pay for your car - no matter where you buy it from!
With traditional car finance providers, you'll often apply at the dealership. This means reading and understanding lots of paperwork and then providing evidence to the dealer about your income (could be in the form of bank statements etc).
Once you've done this, they'll run a credit check on you in order to see your credit history, credit score, and other bits of information about your financial history. You'll also need proof of identification, i.e. your passport or driving licence. This should result in a finance offer if all goes well.
What should I do next?
Firstly, you may want to confirm with your lender as to why your application was not accepted. If you're prepared to wait on hold on the phone for a while... If not, then perhaps it's time to try a new provider, and who knows, you might even get a better deal!
But before you apply somewhere else, one important point to check is: Did the lender run a full/hard credit search that has left a mark on my credit file? If the answer is yes, then it might not be a good idea to jump straight into another application.
When a lender runs a hard credit search, it will impact your credit file, and if this happens multiple times in a short period, then you will likely decrease your credit score, and subsequent applications will end up seeming more expensive - they will see you as a bigger risk.
With Carmoola, you can check if you'll be approved without ever running a hard credit check, so there's no risk. Why not download the app and try us out?
How do I increase my chances of getting accepted next time?
Here are our top tips for ensuring you increase your chances of getting accepted for car finance when you next apply:
- Check your affordability in advance. It's a good idea to have a look at your own finances, and see exactly what you can afford to borrow. This could impact your next application, so you don't request to borrow more than you can comfortably afford.
- Repay existing debts. This is a sure-fire way to improve your credit profile and get you back on track with your finances. Once you repay your debts, your credit file will look much less risky to lenders, and this could even result in you getting a better deal overall!
- Close any credit accounts you're not using. Some people take out lots of credit cards but don't end up using them. However, lenders may see this on your file and view it as a risk that you may be in financial trouble. Close down unused accounts, and it will decrease your un-utilised credit amount.
So, now you're feeling suitably on top of your finances, do you think this article might help others with understanding why they were rejected for car finance? If you know someone else who'd benefit from reading this article, then give it a share and spread the Carmoola love 😍