What to Do if You are Denied a Car Loan

1. Understand Why You Were Denied

If you've been denied an auto loan, lenders are required by law to provide an adverse action notice. Under the Equal Credit Opportunity Act or Fair Credit Reporting Act, the lender has 60 days to provide a list of the reasons you were rejected or notify of your right for an explanation (and how to get it).

If your application was rejected due to your credit score, the lender must legally take additional steps, including providing you with the score used in its decision and information about how to get a free copy of your credit report. Other common reasons for denial may include not meeting a lender's minimum income requirements, application errors, a high debt-to-income ratio, repossession history or other factors that don't fit the auto lender's ideal borrower profile.

2. Improve Your Credit Score

While there's no minimum credit score requirement for car loans, your credit score is a key factor most auto lenders consider. A higher credit score can help you get approved for a car loan and get access to more favorable terms, like higher loan limits and lower interest rates.

Here are a few tips that can help build your score over time:

• Catch up on past-due payments
• Pay down debt balances
• Make all payments on time
• Limit unnecessary credit applications

Learn more: How to Improve Your Credit

3. Explore Your Financing Options

You might be able to explore other financing options if you're denied an auto loan. For instance, many automakers offer captive financing, also known as in-house financing. Instead of borrowing from a bank, credit union or other financial institution, your loan is issued directly by the automaker.

Dealer-arranged financing is another alternative to consider. With this type of auto financing, the dealer typically reaches out to a few lenders on your behalf. You could end up paying more, however, since dealers typically add extra interest to cover handling the financing.

Some dealers may offer buy here, pay here (BHPH) auto loans—sometimes advertised as loans for borrowers with no credit. While these may be tempting if your credit needs work, interest rates and down payment requirements could be much higher than standard loans.

4. Consider Leasing a Car

Leasing a car may be a good temporary alternative to financing a new vehicle. Leases are typically short-term commitments. So if you're working on improving your credit, need more time to save up a down payment or pay off some debt, a lease may be worth considering. Leasing can also help you build credit if you make your payments on time since lease payments typically appear on your credit reports.

Minimum credit score requirements for an auto lease may vary by lender, but financing companies typically look for signs that you're a dependable borrower. Borrowers with good or better credit scores have a better chance of being approved for a lease with a favorable interest rate. You may still be able to lease a car with a bad credit score, but you'll likely be charged a higher interest rate.

Learn more: What Credit Score Do I Need for a Car Lease?

5. Decrease Your Debt

Generally, auto lenders look for a borrower with a debt-to-income ratio (DTI) under 50%. Your DTI measures how much of your monthly income goes to paying debt, including loans and credit card payments. The higher this ratio is, the more risky you appear to a lender. Taking steps to lower your DTI can help you show lenders you have the extra income after your current debt obligations to take on new payments.

Consider these three steps to lower your DTI:

1. Avoid taking on more debt. Adding new debt will derail any direct efforts to lower your DTI. A budget can help you stay focused on paying off debt and avoid overspending.
2. Reduce your existing debt. Paying off existing debt is a direct way to lower your DTI. Take stock of all your debts and begin a debt repayment strategy to lower balances faster.
3. Increase your income. Boosting your income helps directly lower your DTI. Consider picking up a side gig, asking for a raise or pursuing a higher-paying job.

6. Buy a Used Car

In the fourth quarter of 2024, the average amount financed for a new car was $41,572, according to Experian's State of the Automotive Finance Market report. By contrast, the average amount financed for a used car was $26,468. In other words, the average new car loan balance is 57% more than the average used car loan balance.

Taking out a smaller loan could help you get approved. Just keep in mind that used car loans typically charge higher interest than loans for new cars. Selling your current car either privately or through a trade-in can reduce the amount you have to borrow, which could improve your chances of approval.

Learn more: How to Get a Used Car Loan

7. Save for a Down Payment

A larger down payment can help lower the cost of your auto loan because the more you save before applying, the less you'll need to borrow. This can not only save you on the overall cost of the loan, including the amount you'll pay in interest, but can make you more attractive to lenders. Aim to put at least 20% down on a new car and 10% on a used car.

If you don't need to buy a vehicle right away, start by creating a budget to get a handle on your income and spending. Then set a specific savings goal. Cutting spending and avoiding taking on additional debt can help you save up for your down payment faster.

8. Find a Cosigner

If you're hitting a dead end in trying to qualify for a car loan, consider asking a trusted family member or friend to cosign the loan. A cosigner is someone who applies for a loan with you and shares the financial responsibility for repaying the loan if you can't, but they don't co-own the vehicle. Lenders consider both your and the cosigner's credit histories and finances when reviewing the loan application.

When choosing a cosigner, it's important to find someone with a relatively high credit score, steady income and minimal debt. Lenders have their own credit requirements, but cosigners typically need a credit score of 670 or more and your cosigner's DTI must also be within the lender's limits.

Frequently Asked Questions

The Bottom Line

Being denied a car loan can be frustrating—especially if you were hoping to finance a new car. But there are many steps you can take to better your approval odds in the future. Remember, understanding why your loan application was rejected can help you plan what to do next. Whatever the reason, building and maintaining a good credit history over time can help you obtain favorable auto financing when you're ready.

With Experian, you can monitor your credit for free, with ongoing access to your FICO^® Score^☉ and Experian credit report. You'll also get real-time alerts when changes are made to your credit score, making it easier to stay on top of new developments and address potential problems as they arise.