Need a car, but can't get a loan
August 23, 2010 11:35 PM   Subscribe

Application for auto loan was declined. Now what?

Very personal but probably relevant information:

- This will be our first major loan. We have no mortgage, etc.
- My husband and I just moved to the US last year. I am a US citizen and he is a permanent resident.
- Although I have a lengthy (10 year+) credit history, I am now a full-time graduate student with a lot of student loans. I have a part-time assistantship that brings in about $1000/mo. My credit score is about 680.
- My husband has a credit history that’s only as long as he’s been here. He works full-time and brings in about $2500/mo. We share a credit card (our one and only) but we had to use it a lot as we recently moved. His score is about 700.
- We just moved to our new address this month. Our rent is about $870/mo.
- We applied today online for an auto loan of $17,000 to be repaid over 60 mo. through our bank. I was advised by a representative at the branch to put me as the primary applicant, even though my score is lower.
- We were declined today.

So my question is, what do we do now? My mother advised me to wait for the denial letter, and then to bring it to a branch to try to have them reconsider. She also advised that if that doesn’t work, not to apply for any more auto loans until next month. However, I read on that auto loan applications made within the same month are treated as a single “ding” on your credit report. If that is true, should we then be going through and trying to find alternative financing now before the clock “runs out”? Or should we just give up on trying to finance and go for a lease?

Throwaway email:
posted by anonymous to Work & Money (22 answers total) 2 users marked this as a favorite
I don't know how the credit report is processed, but I know for home mortgage shopping you have a time period in which it only counts for one ding against you. I assume (without knowing for sure) that it is similar for auto loans. So if you want the car, shop around and see if another financial institution will loan you the money. If no one will loan it, then you see if the dealer is willing to finance it for you -- but this could have you paying through the nose if you're not careful.

If you absolutely cannot get a loan, I would much rather buy an inexpensive car and save up than lease. Leasing is a really bad decision unless 1) You absolutely must have the newest model car every few years, or 2) You run a business and can write off the lease because you use the auto for work related purposes. But even then, you're talking about a contract in which you're usually responsible for all mileage incurred, plus you pay an initial amount down, a high monthly payment and have no equity to show for it once your lease is finished (being able to buy a now-used car at used car prices when the lease ends is hardly equity.)
posted by Happydaz at 12:22 AM on August 24, 2010 [1 favorite]

Try joining your local credit union. I don't know how they treat candidates with sub-par credit scores, but in my experience, loans and lines of credit at my credit union have been (a) more personal, with an actual person really taking the time to find the best option to you and make sure you understand all terms, (b) easier to get for US permanent residents, and (c) with way, way, way better rates than those offered by banks.

Your household income is about $40,000 a year. You shouldn't have to bother filling out applications to know that a $17,000 car is about as bad an idea as it gets.
posted by halogen at 12:41 AM on August 24, 2010 [3 favorites]

It will be much easier to buy a car that you can afford already, and then put aside all the loan payments that you would have made and use them to save up for the swish car you want.

That way, you won't need to convince anyone at all that you can afford the payments, and if one of you loses your income for whatever reason you will be in a much better position.
posted by emilyw at 1:29 AM on August 24, 2010

Buy a cheap used car. Under $10,000 will get you a totally fine used car with a new warranty. Consider Hondas, Toyotas etc. You will probably get approved for a lower loan amount. Also, the used car market seems to be a buyer's market at the moment.
posted by twblalock at 1:49 AM on August 24, 2010 [2 favorites]

Another option is to get a family member to cosign the loan. That means, if you stop making payments, then the cosigner agrees to make the payments. Think about it carefully, though. It may be that your credit scores weren't the problem, but instead your total debt and income are the problem. I believe if you are turned down for a loan, they must tell you why.
posted by Houstonian at 3:11 AM on August 24, 2010

The reason you were declined is probably because you were asking to borrow too much money. The loan payments are in excess of 10% of your net income. You'll have better luck asking for less than 10% of your net.
posted by valkyryn at 3:59 AM on August 24, 2010 [3 favorites]

I got declined for a car loan from the same bank that had given me one for a previous car 5 years before (the car was totaled in an accident that was not my fault). Their reasoning was that grad student income "isn't reliable" (even though I've been paid the same thing every month for the past 5 years and can't be fired without cause, thus making grad student income more reliable than many of my friends with 'real' jobs), and "the economy has changed since your last loan".

I got a loan from Honda without any questions at all.

All that said, you can finance a quality used car, and that would bring your payments down.
posted by hydropsyche at 5:01 AM on August 24, 2010


I bought a new car recently and have a similar background to your husband -- moved to the United States relatively recently etc. From my car loan application experiences, it seems to me that loans have apparently become more difficult to obtain and the requirements have been tightened.

I had applied (and the dealership applied for me) at several banks and I was approved at very few places. Most of the rejections appeared based on the fact that I had a short credit history. Credit score is also a factor but since mine is decent - 760, it didn't appear to help all that much! So your bank representative was probably on the right track by recommending that you apply as a primary applicant.

Purely on speculation, your high debt/income ratio (student loans vs student income) is likely affecting your loan application. With your husband, the short credit history is probably the primary negative factor.

My advice, mostly random and unorganized: this may contain inaccuracies, more knowledgeable posters will likely correct me if I am wrong.

- You should definitely keep applying around inside this 30 day window. This is what I have done as well, and while I have not yet seen the impact to my credit score, it seems perfectly reasonable that one would want to 'shop' around for the best interest rates.

- Approval for bank loans seems to be an automated & computerized process -- it could help if you go ahead and meet a representative directly. They may have good advice for you as well for securing financing for your car.

- Try your credit union -- I had no luck there though.

- Can't comment on the lease option, since I have little experience there. From what I've researched, leasing is not always a bad idea -- it actually appears fits a certain demographic of customers pretty well. For these customers it makes better financial sense for them to lease rather than buy. You will have to research your current financial situation thoroughly and understand all the requirements etc involved in leasing a car -- with leasing your mileage is restricted, insurance has a different set of requirements and so on. The most I would say is, since you have student loans and other financial obligations to meet, it may be best to avoid this option for now.

In the end I did secure a loan amount fairly larger than yours, by making a down payment that was over 1/3 of the negotiated sale value of the car. Making a large down payment helps your loan application a lot, because of the way the bank reasons: in the worst case, if you end up defaulting on the loan in the very first month, the bank may still auction the car off and recover their loan. In an auction the bank can expect to recover at least 2/3rds of the value of the car, which is basically your loan.

There's nothing really wrong with an auto loan; from what I have been told it actually helps your credit score and may even help your mortgage application down the line. I've always bought my cars outright, and being a first-time buyer was surprisingly difficult, even though I have supposedly perfect credit, a decent income, a steady job and every other positive factor you could think of.

Used cars are always an option, too. Just bear in mind that you will need to do your homework on the vehicle to avoid nasty surprises & expensive repairs down the road (I owned a used BMW before this car, bad example, but still...). There's a lot of good deals to be had though with used cars, if you search around long enough.

Lastly, you could just avoid buying cars and live on-campus/take public transport/cabs. That's what I did for the longest time! ;-) I could have afforded a new car at any time; I was continually badgered by my coworkers to buy a new car from the day I started working ... but I was born and grew up in a megacity where I took public transport everywhere, and I was still so used to that life. If I ever go back, I'd probably not buy a car again. So ... nothing really wrong with this option as well, provided your city/neighbourhood/public transport supports it.

Good luck! Hope this post helps, let us know how it all goes and what you decide.
posted by the_ancient_mariner at 5:11 AM on August 24, 2010

Same deal happened to me also.

I bought my car through CarMax (a great resource, btw), and they gave me a loan with almost no problems. The interest rate was higher than what my bank was offering but denied me, but the difference ends up being about $20 a month (which I can totally afford). So, perhaps you might want to go through them. Their used cars are of a very high quality and are subject to something like a billion point inspection.

I've only had the car about 3 weeks, but I did drive it all the way from Milwaukee, WI to San Marcos, TX and didn't have any problems along the way. If it matters, it is a 2007 Honda Civic, had about 26K miles on it when I got it and was about $15K.

I never understood that business about the loans, though. The bank wouldn't give me a loan where the payments would be lower than the loan CarMax gave me. C'est la vie.
posted by King Bee at 6:42 AM on August 24, 2010 [1 favorite]

My credit score is a little lower than yours, my household income is a little higher (we make probably about $45k/year), I'm also a full-time graduate student, and I easily obtained an auto loan of $10,000 through the dealership. You can actually get a pretty nice car for $10k if you shop around a little, especially if you know how to drive a manual transmission. So I'm nth-ing the "cheaper car" option.
posted by kataclysm at 6:58 AM on August 24, 2010

My credit union gave me a loan when other banks would not.
posted by salvia at 7:47 AM on August 24, 2010

Yeah, go lower, think used, and try a credit union. I got approved a year ago with less money and worse credit for a used car, $11,000 total.
posted by SMPA at 9:54 AM on August 24, 2010

Our family has a higher income than you guys, and we would not consider a car at that price right now (too much debt, affecting cash flow too much). We needed a minivan a while back, and really liked the Hondas/Toyotas, but they were something like your price range and the domestics were thousands cheaper, around $10k. We could actually afford the more expensive one, and after the (used auto) dealership ran the numbers they were falling over themselves getting us to spend more. But the cheaper option worked out fine.

When I was a bit younger in your situation about 15 years ago, I bought a $800 beater that was itself about 15 years old at the time. I currently drive a 25 year old rusting vehicle that is probably worth 2-3k and is cheap to insure and has been paid for for quite some time.

I guess what I'm saying here is that what I would do is buy the absolute cheapest car you can. It takes a *whole lot* of repairs to equal a car payment, even used. I really don't know what your cash flow is like or what you have saved up, but I'm going to take a guess and say you should look at cars more like the $5k range. Just my opinion; many people care a great deal about having the nicest cars. I wouldn't mind a "nice" car, but there's really so many things I'd rather spend money on than this thing sitting in the driveway that loses value by the second. I suspect you may have other priorities as well.
posted by RikiTikiTavi at 9:58 AM on August 24, 2010

After perusing a random city's Craigslist, I see no reason why you even have to spend $5000. Here's a $500 '98 Ford Escort with 114k miles (link will eventually die, of course).

You also don't mention how much you're going to be driving, and what the needs are, and where you are. Are you going to be driving so much you need a relatively low-mileage car? Do both of you need it? Can one of you use alternate transportation? Is a motorcycle an option?

In any case, you can get plenty of car for less. I don't know about the credit implications of multiple credit checks, but in general dealerships are going to be more aggressive about qualifying you (because otherwise, they probably don't get the sale). But the terms can be worse. There are some pretty good no-interest deals out there right now, but for new cars which is probably not a good idea for you guys. You want as little debt as possible, here.
posted by RikiTikiTavi at 10:07 AM on August 24, 2010

I fundamentally disagree with RikiTikiTavi about car-buying strategies. In my experience, it does NOT take very many repairs to equal a car payment, and for a grad student who doesn't have the option of pulling some overtime hours to quickly pay for a repair, it is much more attractive to have a reliable car with a warranty and service agreement, so that there is a known quantity of money to figure into your budget. That's why I traded in my still-driveable Honda Civic. I owned that Civic outright and it had only 140,000 miles on it. However, I got sick of occasionally having to randomly find $500-$1000 to pay for exhaust systems, broken brake calipers, and (on one occasion) every single drive belt AND the serpentine belt in the car. So when the repair bills mounted to $2000 a year and I could feel the transmission getting ready to die, I traded in the car.

There's such a thing as being penny-wise and pound foolish. For example, a '98 Ford Escort with 114k miles is a car that I wouldn't take if you tried to GIVE it to me, because that is a car that is on its deathbed. You might spend $500 for it now, but I shudder to think about how much money could be poured down the hole of keeping that heap out of the scrap yard. Figure out how much money you can comfortably afford to spend on your car payment, and get the nicest car you can for that price or cheaper. You don't want to take on too much debt, it's true. But then again, I'm assuming that you're an adult and can make your own decisions about how much money you can afford to spend, yes? And you would also probably like a vehicle that won't break down on the highway in mid-winter 300 miles from anywhere, or suddenly have pieces of itself drop onto the highway in the middle of rush hour when you're trying to fight your way across town to an appointment.
posted by kataclysm at 10:36 AM on August 24, 2010 [5 favorites]

Seconding kataclysm: it doesn't take many repairs to equal one car payment, it takes many car payments to equal one significant repair.
posted by valkyryn at 11:12 AM on August 24, 2010 [1 favorite]

Reliability is a concern, but do the math. A $17,000 car loan is about $350 a month, right? That's guaranteed, you have to pay $4200 a year, for five years, whether the car breaks or not. Even if you have a *really* bad year of car repairs, there is no way you will have those kinds of repairs every year for 5 years straight.

It doesn't take much to maintain a vehicle, *IF* you have a mechanic that is not trying to screw you. If you do, or you do like some people I know and walk in and say "it's making a noise and I only have $1200 in my savings account!!", yeah, you are going to pay a lot.

And if you are that kind of person, your new car will soon become a very expensive used car, sucking up monthly payments AND expensive repair bills. Just food for thought...

Loan advice: my brother was in a similar situation and was confounded by the fact that he would get turned down for $10,000 used car loans, but be offered $20,000 new car loans any day of the week. If the bank won't do it after asking again, and a credit union isn't an option or doesn't help you either, consider getting a loan from the car dealers. Their "finance manager" people know how to get people loans. They don't get the gold jewelry, french cuffs and toupees for nothing. It probably won't be a very good loan, but if you need it and read the fine print to make sure you really are getting what you think you are, then that's what you will have to do.
posted by gjc at 1:35 PM on August 24, 2010

Having sold new cars for a living I would recommend seeing what the dealership's finance office can do for you. Depending on your market, the dealership can likely get you rates as good as, or better than any bank you can find. The banks they work with often give the dealer a discount because they provide such a large volume of loans so even with the little bit the dealer takes off the top the rates are usually better. Additionally, the finance manager will often know some tricks to getting the loan approved and/or can call in favors from their contacts at the banks they work with. In some areas, car dealerships can also write loans through credit unions too.
posted by VTX at 2:58 PM on August 24, 2010

I completely back up the suggestions to join a local credit union. That's where my auto loan came from. They often offer very competitive rates as well.

The other thing I would do is just get a cheaper car. $10,000 buys a lot of car these days, especially if it's a couple years old. If you continue to not qualify for $17k, you could have a much better chance of qualifying for $10k.
posted by kryptonik at 3:50 PM on August 24, 2010

Your question spurred me to calculate:

I've owned eleven cars over the last 28 years.

Two of them were gifts.

The other nine cost a total of $4,275 (thirty percent of that was a single especially expensive car that cost $1,300). I estimate that I've spent close to $5,000 in repairs over 28 years, so that's a total cost of almost $10,000. Half of these I drove until they died; the other half I sold for a total of about $1,500, and I still own two of the eleven and could probably get $1,000 for each of them on Craigslist right now.

So let's say a net cost of $6,500 for 28 years of cars -- exclusive of fuel and insurance, of course.

I have three secrets: First, be lucky (I certainly have been). Second, own two cheap cars, not one: They'll each spend more time being unreliable, so it's good to build in a backup for when one is being cranky.

Third, give yourself carte blanche to rent a car anytime without the least compunction for when you're doing something ambitious. I don't know how much car rental has cost me over three decades -- I'll take a wild and convenient guess and say $3,500. That means my cars have cost me $10,000 over 28 years, or $357 per year.

You must adjust for inflation.

Anonymous, your income is lower than mine, you're a student incurring big debt, your bank thinks you're crazy to consider buying a $17,000 car, and so do I. Don't do it. You don't have to be as screwy as me -- go ahead and splurge and get a $2,000 car, I dare you! -- and rent a car whenever it makes the slightest bit of sense. Car buyers like kataklysm and valkyryn are subsidizing a fantastic deal for us -- don't let it go to waste.
posted by gum at 4:55 PM on August 24, 2010 [1 favorite]

Oh, and you won't buy comprehensive insurance for this car, so your insurance cost will be tiny; and you'll never pay a cent of interest on a car loan, so you'll never pay a cent of interest. Those factors, too.
posted by gum at 4:57 PM on August 24, 2010

gum's system can be made to work, but I think he underestimates just how much the "be lucky" component factors in there. $5000 in repairs? Over twenty-eight years>? Really? I've spent almost that in the last ten. Over time, this has the potential to be a vastly more expensive way of operating a vehicle than having a single, reliable vehicle, even if it's a late-model used car.

Instead, what he seems to be doing is instead of repairing cars when they get expensive, just throw them away and buy a new one. Note that he's owned a little more than one car for every three years. Repairing a transmission, even once, is going to cost you at least $1000, and if you only paid that much for your car, well, there's no sense in that. But buying a $1000 car means the odds of one incurring a $1000 or more repair bill are pretty decent.

Still, as you're a student, trying this for a year or three has the potential to make some sense. You really don't need a new vehicle, and buying three disposable, $2000 cars will cost you way less than buying or even leasing a new-ish one.

What you're getting with newer cars isn't just a way of getting from point A to point B, you're buying reliability and support. Similarly, buying a house can be more expensive than renting (and vice versa, obviously), by a simple "I have a place to sleep" criteria, only you're buying things like privacy, space, and customizability that you don't have when you rent, but renting does get you a guaranteed maximum housing payment and free maintenance. One isn't obviously better than the other, but they are different ways of allocating your money.

Maybe a reliable vehicle isn't something you want to spend money on. It certainly seems that gum doesn't. But it isn't a silly thing to spend your money on, provided you've got it, just like

Which it seems that you do not. So buy yourself a beater and hope it lasts for a year or two. Even if it doesn't, you'll probably wind up spending less than you would on the loan you couldn't get.
posted by valkyryn at 8:00 AM on August 25, 2010 [1 favorite]

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