Can’t Get a Car Loan? You Still Might Have Other Options

From learning why your loan was denied to using special car-buying programs, here are suggestions when you can’t get a car loan.
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Written by Shannon Bradley
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Record high auto loan denials are leaving more people stranded.

The 12-month rejection rate for auto loans hit 14.2% at the end of June, according to the Federal Reserve Bank of New York. This was the highest auto loan rejection rate since 2013, when the Fed began tracking such data. Access to auto credit has improved slightly in recent months, but qualifying for an auto loan is still more difficult than it was a year ago.

The current state of the market — with high auto loan interest rates, budget-stretching car payments and loan delinquencies trending upward — has caused lenders to tighten credit out of concern that more people will default on loans.

If you're dealing with auto loan denials and wondering where to turn, here are some suggestions.

Find out why your car loan was denied

Under the Equal Credit Opportunity Act, lenders are required to provide an adverse action notice listing the reasons your loan was denied or details about requesting those reasons within 60 days. If you don’t receive such a notice, ask for it.

Even if you meet a lender’s minimum income requirements, your loan could still be denied for other reasons, such as having a short or inconsistent work history, or little to no credit history. Having a high debt-to-income ratio — the amount of debt on credit cards, other loans or a mortgage compared with the amount you’re paid — is another possible reason for loan denial. Also, a loan application could be declined for something simple like incorrect or missing information in your application.

Knowing why your loan was declined can be a starting point to overcoming those obstacles.

Save for a car down payment

Caleb Cook, vice president of consumer lending at Digital Federal Credit Union, said in an email that “saving for a down payment can be just as important as working on improving your credit score.” He added, “Having a down payment certainly helps if you’re credit-challenged from an underwriting perspective, and often may be required by the lender.”

The recommended down payment amount for a car is 20% for new and 10% for used — that means, based on today's average car prices, a saver would aim for $9,600 for new and $2,700 for used. For a person with financial challenges, saving these amounts can be difficult.

In some states, residents can save and receive matching funds (up to a certain amount) for a car purchase using a type of savings account called an Individual Development Account (IDA). IDA availability and allowed usage vary by state, and the social service agencies that administer IDAs may have their own requirements.

The nonprofit organization, Prosperity Now, provides a national map of IDA programs to help people research IDAs in their state.

Most IDAs have strict eligibility requirements, and a person has to remain in the program for a period of time to receive matching funds, according to Laura Yepez, program manager on the ecosystems change team at Prosperity Now.

“Matches would typically be 1:1 but could go as high as $3 to $5 [per dollar saved]. Incentivized savings make it easier to reach goals, and most programs have a financial coach that meets with participants to help create and track goals,” Yepez said in an email.

Look into car-buying programs with low-interest loans

While they aren’t abundant, car-buying programs with low-interest loans do exist through nonprofit organizations in certain areas. These programs focus on vehicle ownership as one component of long-term financial stability, so there is usually a financial coaching requirement. Also, participation is limited.

Two examples are Goodwill Cars to Work, which serves residents of Kentucky and some Indiana counties, and Vehicles for Change (VFC) for residents of Maryland and Northern Virginia. Participants for both must be working 30 hours a week, meet income restrictions and show their ability to handle car-related expenses. Credit score isn't a consideration.

Cars to Work participants finance reliable vehicles with a 36-month, fixed 5% APR loan through a partnership with a local credit union and automotive group, according to Kalea Raynor, senior manager of housing and transportation for Goodwill Industries of Kentucky. They must also have $500 in a savings account to start, which is matched by Goodwill. Monthly payments are about $150-$210, and interest is reimbursed if the loan is paid in full with no late payments.

People in the VCF program are referred by partner agencies and guaranteed a low-interest, 12-month loan, says Martin Schwartz, VFC founder and president. Donated cars are made road-ready by Automotive Service Excellence-certified mechanics at the VFC Full Circle Training Program, which provides auto technician training for individuals with employment barriers. Awarded cars cost approximately $950 in total with $100 monthly payments, and ongoing car maintenance is available through Full Circle at a reduced cost.

To see if similar car-buying programs are available in your area, contact United Way (call 211) or your local community action agency.

Use caution with 'buy here, pay here' car dealerships

Buy here pay here (BHPH) dealerships sell used cars and provide financing for people who can’t get loans elsewhere. The interest rates for this financing are among the highest, and cars may have tracking devices to prevent them from starting if payments are behind.

When asked what advice they have for people who can’t get car loans, Raynor and Schwartz both advised against using BHPH dealers, but Schwartz acknowledged this may be the only option for some people.

He says he’s been contacted by many people whose BHPH cars “fell apart” soon after buying them, but he adds there are such dealers who are “on the up and up.” People need to be cautious and ask questions to find them.

If your only option is a BHPH dealer, make sure your car will be covered by at least a 30-day/3,000-mile warranty and request a vehicle history report. Read your loan paperwork before signing to be clear about the interest rate and monthly payment you’re agreeing to. Look for discrepancies or hidden fees, and ask if on-time payments will be reported to the credit bureaus to help you build credit.

Schwartz also says to ask about tracking devices. “If I can’t make a payment, does my car get turned off in the middle of the road, so I can’t get my children home?”

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