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Why You Were Denied a Car Loan: And How to Get Approved

So you recently face car loan rejection in Ontario eh? That sucks but it’s not the end of the world. What you need to figure out now is what happened and your next steps, curling up in bed and crying is always a valid option but this article will walk you through some steps you can take if you’re feeling more productive.

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What Happened and How Do You Fix It?

Lender’s are not required to tell you why they rejected a loan, so to figure it out you’re going to have to do some investigating. If you’re lucky you’ll be able to ask the lender for a reason, but if not the best place to start is your credit report.

Reasons for Being Denied a Car Loan in Ontario and What to Do Next

Mistakes on Your Car Loan Application: Because the loan application process is so strict, mistakes do happen, and even little errors will cause a loan application to be refused. A field that was left blank or information that was entered incorrectly will result in an immediate rejection.

Fix: Thankfully, it's also a simple fix—you just need to reapply and go over it thoroughly to make sure nothing was missed.

Credit Score Issues: Low or no credit scores are another frequent cause of denial; most vehicle loan providers have a minimum credit score requirement below which they would not extend credit. The average is something in the neighbourhood of 650; below that, they deem you too hazardous to invest in. Of course, they won't tell you this number. 

Lenders usually deny bad credit applications because they aren't confident enough that you'll be able to pay back the loan in full and on time. Being denied a car loan in Canada for having no credit is strange, because paying a loan is one of the best ways to increase credit. However, lenders notice that you don't have a credit history and don't have enough information to determine that your a suitable borrower.

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Get a co-signer: a co-signer is someone who co-signs and shares responsibility for the loan with you. Meaning if you cannot afford to pay the loan, the responsibility then goes to your co-signer. If you have a low or no credit score, a co-signer can be a great way to ensure the lender that the loan will be paid on time.

Start rebuilding your credit score: Take some time to try and rebuild your credit and/or improve your financial situation. Keep working hard at this and you'll find yourself approved for a car loan in no time. The easiest is to make regular purchases with credit and pay them back on time.

Shop around (and get pre-approved): Lenders vary greatly in what they do and do not approve. If you've recently faced car loan rejection in Ontario from a specific lender, try shopping around and see if any other lender would approve you for the same deal. By the way, we offer 100% guaranteed approval regardless of your credit situation. Click here to get started.

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Increase your down payment: This might not be an option, but the more money you put down on a new (to you) vehicle, the less money you'll need to borrow. With credit issues, you'll have a higher chance of approval if the loan amount is smaller. So, you might have to start saving money for a larger down payment.

Extend your loan term length: Financing a vehicle at a longer loan term length means you'll be paying less every month and therefore will be more likely to pay off the loan. Here's an example; let's say you want a $40,000 car with $5,000 down. If you pay the remaining $35,000 over 60 months at 5% interest, you'll be paying roughly $612 per month. Compare this to paying the $35,000 over 84 months at 5% interest which would be roughly $437 per month. Quite the difference!

Consider a newer carIf you're currently trying to get a loan after being denied a car loan in Canada for an older car. Newer cars almost always have lower interest rates which will lower your monthly payments. Newer cars are also more likely to have deals!

...Back to the reasons for being denied.

Too many loans/too much debt: Lenders are unlikely to extend you more credit if you already have a large number of loans that are being repaid since you pose a danger of defaulting on them. The only figure they care about is your DTI ratio, often known as your "debt to income ratio," regardless of whether you're actually making your loan payments on time or not. Basically, it's the difference between your monthly debt payments and your monthly income. Generally lenders will be less likely to grant you a loan if your DTI ratio is over 50%

Fix: If this was the reason for your application being denied, your only practical choice is to settle some of your current debt before applying for a new loan.

Insufficient or Unstable Income: Lenders prefer stability, therefore they may reject your application if your recent revenue history is erratic. This irregularity may result from a variety of factors, but the lender won't appreciate it if you recently started a new career or are in between employment. Lenders really dislike self-employed people who operate on commission or contracts, so you'll have to smother them in paperwork in order to get authorized. If not, you'll just have to wait till you can show that your financial condition is steady using your paystubs.

FixThis is a tough one. Unfortunately, you'll have to smother them in paperwork in order to get authorized. If not, you'll just have to wait till you can show that your financial condition is steady using your paystubs. You can also try to borrow less, get another job, use a larger down payment, or improve your financial situation in other ways. Otherwise, keep shopping around. You might find a lender that isn't so worried about your unstable income. Like us! 

Asking For Too Much: The meaning of "too much" is different for everyone and could be based on a number of things. Most commonly though it's based on the things we've listed above, or you've simply asked for more than the lender would be willing to give in any scenario.

FixKeep working on fixing the issues above and lenders will be able to offer you a higher loan amount, or simply find a cheaper car. Use this calculator to see how much you can afford.

Errors on Your Credit Report: Issues on your credit report can cause a decrease in credit score ranging from insignificant to detrimental. It's important you make sure you don't have any errors on your credit report before applying for large loans.

FixYou'll need to get in touch with the credit bureau and have the error fixed, it’s a bit of a hassle but well worth it, especially if the error is having a serious effect.


If you're ready for a car loan in Southern Ontario, we'd love to help! simply fill in the form below to get started.

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