Navigating car finance can be challenging, especially when faced with application refusal. Here we explore common pitfalls in the application process and gain insights into how to confidently overcome obstacles on your journey to approval.
Reasons for car finance refusal
It’s never a nice feeling having any kind of application turned down, and a rejected car finance application can feel particularly disheartening. There are a few reasons an application for car finance might not make the cut – let’s take a look here.
Poor credit history
Your credit history, or credit score, is a record of your financial history. It includes any money you have borrowed and any repayments you’ve made, including any defaults. Your credit score is a number that is used by lenders to decide how likely you are to repay credit. In other words, finance providers use it to work out whether they want to offer you credit.
If you have a very low credit score, you might not qualify for credit at all. If you do qualify, you are likely to have to pay a higher interest rate than someone with a high credit score.
Too many applications for credit in a short space of time
If you make lots of applications for credit – you apply for several credit cards, for example – over a short space of time, these applications will be visible to lenders on any credit check that they make. Multiple applications can sound alarm bells for potential creditors because they suggest that the applicant is in desperate need of credit and could therefore be a high-risk customer.
Not meeting lender's criteria
Different lenders will have different criteria, and many will have hard and fast rules about eligibility, so it’s worth doing your homework before you apply. Broadly speaking, you can expect to have to be at least 18 years old, have a reasonable credit score, and be able to provide evidence of a stable income and home address. If you can’t meet these criteria, you are likely to be turned down.
Previous rejections
Other factors to consider include previous rejections. If you have been refused car finance in the past, the first thing to do is figure out why. Most refusals boil down to poor credit history, or errors in the application. If application error is the case, then there could be a quick fix.
If you have previously applied for car finance and been turned down several times, then these failed applications will show up on your credit record and make it increasingly difficult to secure finance. In this instance, it’s best to pause and take steps to improve your credit score before making any further applications.
Employment status
When you apply for finance, your lender will want to be assured that you have a regular, reliable income. You will need to supply evidence of your earnings, usually in the form of three months’ worth of bank statements.
If you are self-employed, you may still be accepted for car finance, but you will have to provide additional documentation (such as further evidence of regular earnings) to assure the finance provider you are financially stable.
If you are unemployed, it will be harder to access car finance. If you have a good employment history and can demonstrate that you are between jobs then you may still qualify, but if you have recently lost your job with no prospect of another, you are unlikely to be offered finance from a reputable lender.
Types of driving licence
In most cases, you will need a full, valid driving licence to qualify for any kind of car finance. If you only hold a provisional licence, wait until you’ve passed your test before you apply for finance.
Financial associations with someone who has poor credit
Did you know that being linked financially with someone will be visible to lenders and may affect how the lender views you. If you can, end any financial agreements (e.g. joint bank accounts) you have with anyone who has low credit. This will free you of their negative associations and will, over time, help to boost your own credit rating.
Navigating the path to approval
So, you’ve been knocked back for car finance and are feeling anxious about applying again. That’s only natural, but it’s important to remember that the decision-making process for car finance is never personal and although an applicant might be rejected by a lender today, they may well qualify the next time around.
The good news is that even if you have been rejected for car finance, there are several things you can do to improve your chances of being accepted in the future.
If you can show potential lenders that you have:
A good credit score
A stable income
Manageable debt
Then you will be in good shape for your next car finance application.
Steps you can take to actively improve your chances of securing car finance in future include:
Making sure you are on the electoral roll
Ensure your debts are manageable and you are making regular repayments
If you can, end any financial agreements you have with anyone with a poor credit rating
Cancel unnecessary subscriptions and keep your spending in check
The key is to be able to prove that you can afford your repayments. In the next section we’ll take a look at how this can be done.
Get in the best shape to apply
The very best thing you can do before applying for car finance, is to make sure any outstanding debts are manageable.
Don’t worry if you have small, regular debts (such as household bills) to pay – most people have these – in fact, if you regularly repay all your debts on time (any other loans, credit cards, mortgage, etc) then lenders will see you as a reliable debtor.
If you live in shared accommodation and everyone pays their bills on time and in full, put at least one of the household bills in your name.
If you know you would like to apply for car finance in the coming months, avoid making any applications for other finance products in the meantime. Too many applications for credit in a short space of time can put lenders off.
Finally, understand that each lender will have their own criteria. Do your research to make sure you know exactly what your lender of choice needs from you – and ensure that you can provide the relevant paperwork.
Today, many lenders offer an online finance calculator, helping potential customers to explore different terms and amounts without committing. These useful tools can help you work out an estimate of what your monthly repayments could be, based on your desired loan amount and your income.
By helping you to work out what your financial obligations could be over a given timeframe, they can also give you a reasonable idea as to whether car finance is a good option for you.
Judge your lender - are they the best fit for you?
When it comes to car finance, it works both ways: it’s really important that you choose the right provider for you.
Unfortunately, there are some unscrupulous lenders out there who are more interested in taking your money than in helping you secure the best deal for your budget. Make sure that any lender you are considering is accredited by the FCA, and always look at their representative APR.
APR – which stands for annual percentage rate – helps you compare the total cost of different loans. Representative APR indicates the average annual percentage rate that more than 50% of customers are offered by a particular lender. It doesn’t mean that you will necessarily be offered this rate, but if the representative APR of a lender is very high, you may not get a good deal with them. Compare the representative APRs of several car finance providers to gauge what feels like a fair deal and help you make an informed decision.
Understand your budget
Use a budgeting tool (there are plenty to be found online) to help you get a handle on your spending and better manage your money. Be ruthlessly honest with yourself. Most lenders will ask you to fill one out to assess your affordability as part of the application process.
Get all your documents ready. You will need to supply ID, proof of address, proof of earnings, bank statements, trading account details (if you’re self-employed) and other documentation besides.
Insights for a confident approach
As we have seen, while a car finance application rejection can be frustrating, it is not a personal reflection on you, and it is not forever.
Be mindful of your finances, be proactive about looking after your credit score (get in the habit of checking it a couple of times a year), make sure you pay your bills on time and be aware of your spending.
And lastly, don’t be afraid to ask for help if you are struggling – there is help out there and you are not alone.
