Can A Car Loan Be Denied After The Purchase?

You find the perfect car, negotiate a price, sign the papers and drive off. All is well until the dealer calls you and says the auto loan you used has been denied — and you either have to return the car or agree to the adjusted terms.

While rare, a car loan can be denied after approval. Sometimes it’s a predatory practice, and sometimes it’s just a matter of your application needing updates. Here’s a look at why that happens and what you can do.

Why your car loan can be denied after you leave the dealership

When you get a car loan, a dealership will sometimes allow you to take delivery of the car even though your loan has not been fully approved. And while the likelihood of your car loan being denied is low, it can happen even after you leave the lot.

In general, your financing could be denied because of a change in your finances or a problem with your application.

• You lost your job: The lender will likely verify your employment when processing your application for financing. If it can’t confirm your employment because you were terminated, laid off or resigned, your application could be denied.
• Your income went down: Whether it’s the result of a job change or reduction in hours by your employer, the lender may decide you can no longer afford the monthly car payments and deny you an auto loan.
• Your application contains unverifiable information: Are there typos in your application? Did you get a new job or relocate after getting preapproved for an auto loan? These are all reasons for the lender to deny your loan if you failed to notify it of the changes.

At the dealership

When buying from a dealership, it’s important to read all the papers you are signing. See if there are any contingencies — “contingent upon financing approval,” for example.

Sometimes, dealerships use a form called a rescission agreement to outline the contingencies. While there are many kinds of contingencies, dealer financing contingencies are one of the most common. It makes sense when you think about it. You can’t keep your new car if your loan is not approved.

Many dealerships allow you to take your car home before the loan is fully finalized, a practice called spot delivery. But there’s a chance you’ll later be notified that the loan was denied.

Be aware of financing scams

Although the denial may be legitimate, you may have also been involved in a yo-yo scam. When you obtain financing from a dealership, the sales rep may offer you a low interest rate on your auto loan that sounds too good to be true. After the documents are signed and you’ve gone home, the dealer will say that your loan has been denied and ask you to accept a new contract with significantly worse terms.

If this happens, review the purchase contract, request the denial letter and contact your state attorney general’s office if you suspect you’ve been misled. If the dealer is threatening to report the vehicle as stolen or repossess the vehicle immediately, then you are likely dealing with a scam.

With a bank, credit union or online lender

Banks, credit unions and online lenders may not approve your car loan if they can’t verify the information you provided on your application, even if you received loan preapproval beforehand.

Most lenders will give conditional approval after briefly reviewing your financial details. And most dealers will allow you to take possession of the car with only this initial approval. You’ll have to sign paperwork allowing them to retake possession if you don’t get final loan approval.

Over the next few days, the lender will look through the information on your application in more detail. If they can’t verify the information, they may deny your loan.

This type of situation can be frustrating, but it happens because lenders and dealers want the car-buying process to be quick. Consumers are less likely to buy a car or get a loan from someone who won’t give a loan approval for a few days.

How to handle an auto loan denial after you buy the car

You’ll rarely be denied an auto loan after initial approval unless your information has changed or there was a mistake. Here’s how you can respond:

• Step 1. Contact the lender
  

  Find out why the loan was denied. Request a formal denial letter — also known as an Adverse Action Notice — and ask if the issue was due to unverifiable information, credit concerns or employment changes. Clarifying the reason will help you determine your next steps.

• Step 2. Provide updated information
  

  If you’ve changed jobs, moved or your income has changed, share the updated details with your lender. You may still qualify with a corrected application or rework the loan under new terms.

• Step 3. Review your contract carefully
  

  Check your original agreement to see if there’s a contingency clause. You may find that the lender has no legal right to cancel the loan agreement. If so, consult with an attorney to learn more about your rights.

• Step 4. Purchase the car another way
  

  If the original loan falls through, explore other ways to finance the vehicle. Use savings or a personal loan to pay the dealer in full. You can also consider adding a cosigner or applying to a different lender.

• Step 5. Return the car
  

  If you can’t get a new loan and you signed a contract with contingencies, you must return the car. In that case, you’ll need to start the car-shopping process again — this time with clearer terms upfront.

What to do before your auto loan is finalized

It’s wise to avoid major financial changes before you fully close on your auto loan. Here are a few ways to improve your chances of being approved for an auto loan:

• Don’t make any large purchases: Changing your credit utilization ratio can affect your credit score, which may affect your car loan.
• Stay at your job: Lenders want to know you have a reliable income and can repay your loan.
• Don’t open new credit cards: New entries to your credit report can make lenders wonder if there is something else going on.
• Look at your credit report: Take a look at your credit report and ensure there are no errors or inaccuracies hurting your credit score.
• Review your loan application before submitting it: You want to ensure all components of the loan application are accurately completed to avoid a rejection.

Bottom line

While it doesn’t happen very often, it is possible to find out your car loan has been denied, even after you thought it was approved. To minimize the odds, try not to make any significant changes to your finances or credit until your loan is finalized, including not changing jobs.

If you are denied, you’ll need to either work with the seller to secure a new auto loan, pay for the car in full or return the car and go back to auto shopping.