There are many factors that go into scoring your application. Your credit score is just one variable. Your car type, age, and model may cause a declined application too.
Auto Refinance Application
I have good credit - why did my application get declined?
Overview
Do you have a great credit score, but the bank declined my auto refinance loan application. There are many factors that go into scoring an application for a used car loan refinance. Bad credit for auto refinance isn't the only reason for being declined. Below I will outline some of the most prominent factors that go into scoring an application. If you have good credit, then the possibility still exists that you might not be approved.
Some of the likely reasons for a declined application: no or short employment history, high debt to income or payment to income, unverifiable employment (e.g. you are a private contractor), small income level, high mileage car, age of vehicle, and high loan-to-value ratio. Read below to learn more.
Credit and Asset Factors
The application can be thought of in broad terms of credit worthiness and asset (vehicle) type. Both of these components need to meet the lender’s parameters to be approved for a refinance.
Major Credit Factors:
Credit Score – as reported by the major credit bureaus, such as Experian and TransUnion.
Payment to Income (PTI) – ratio of the car payment to your monthly income.
Debt to Income (DTI) – ratio of your long term liabilities compared to your income.
Payment History – takes into account how well you have been paying on other credit accounts, such as your credit cards or mortgage (if applicable)
Bankruptcy – multiple bankruptcies usually is an indicator of bad credit
Employment History – length of current employment gauges reliability the income stream
Income level – banks will typically have minimum monthly income level requirement
These factors and many others will be used to derive an internal credit score that the bank will use to determine if you are creditworthy. This score will also be used in conjunction with the aforementioned factors to develop the interest rate that the bank will offer to you.
Major Asset Factors:
Make and Model – some banks will decide that a certain Make and/or Model will not be suitable to refinance. The reason is because, in the bank’s opinion, these vehicles do not retain their value very well. Hence the value of the collateral isn’t proportionate to the size of the loan. Ex: Isuzu vehicles may be determined to lose their residual value too quickly, therefore the bank will not refinance these vehicles.
Vehicle Age – newer model cars are preferred because they will have retained more of their original value. Most banks will refinance cars that are eight years old or less.
Loan to Value (LTV) – based on the appraised Kelly Blue Book value the bank will want to keep the loan size compared to the vehicle value under 125-150%.
Mileage – high mileage cars, 80,000 miles and more, usually aren’t candidates for refinance because they will have lost their value because of the high mileage.
Classification – commercial vehicles, classic cars, buses, limos, ATV’s, kit cars will usually not be refinanced. If the bank needs to repo the car and sell it at auction, then likely it will not fetch very much and the bank will lose a lot of money.
Conclusion:
While there are many variables that go into the approval equation, the aforementioned represents the major aspects of the application. If there is a problem, then very likely one of the credit and asset factors are in question. If you are declined then the bank will send a letter explaining why you were declined. The letter probably will not shine much light on why you were declined. We suggest that you get a copy of your credit report to make sure that you understand the current state of your credit and to see if you have any unknown outstanding liabilities that need to be paid off. You can get a free credit report from several companies.
