In rare cases, you may find that your car loan funding for a new car or auto refinance was denied after approval! Stumped about why it happened? This post will clear things up for you.
Getting approval for a car loan (new or refinance) seems like quite a routine matter – shortlist lenders, check for quotes, submit basic details for pre-approval, pick one, and then complete the application to get approved. While it’s common for some lenders to reject your application at the time of pre-approval, it is quite rare for them to deny a loan after the entire approval process!
If you find yourself without loan funding after being approved, it means something has gone wrong with your application process. Here’s a breakdown of why this could happen.
What is the process for a car loan approval?
The usual process to obtain a car loan includes the following:
- Shortlist a bunch of banks or dealerships from where you can finance the car loan
- Apply for pre-approval to multiple lenders/banks
- Compare the rates and monthly amounts for different lenders
- Pick one offer/lender that offers the most benefits for your budget
- Complete the auto loan application by submitting all the required documentation
- Get approved and sign the loan documents to obtain funding
What are the ways in which your car loan can be denied?
There are three ways in which you could be denied a car loan:
- Denial at the pre-approval stage (very common if you don’t meet credit requirements)
- Denial at the application stage (possible if you have too much debt, poor credit, or incomplete information)
- Car loan denial after approval (usually due to contractual errors)
Pre-approval vs. Approval: What’s the difference?
Pre-approval is a tentative offer from the lender based on a quick check of your personal and financial information.
- Getting pre-approved does not guarantee that you will be approved for the loan later. It is only a preliminary step to evaluate your suitability for the loan.
- However, you can apply for pre-approval to multiple lenders and then compare the tentative rates, loan amounts, and terms to decide which one works best for you.
- Since most lenders don’t verify your income or check your credit profile, it will not affect your credit score.
- Pre-approval is also a quicker process, taking just a few minutes.
Auto loan approval means that the lender has checked your credit, verified your income and other financial information, and found you suitable for the loan.
- To get approval, you will have to submit the loan information and other documents for verification.
- This includes information about the loan amount, your type of employment, social security number, annual gross income, car lienholder, and remaining balance (for auto refinancing).
- If all the above documents are in order, the loan is approved. The approval time can vary from a few hours to a few days depending on the lender.
- You will get the loan funding in your bank account between 1-7 days, depending on the lender.
Also read: Which is better for an auto loan: Pre-qualification or Pre-approval?
Can a car loan be denied after approval?
Yes, in some very rare cases, car loans can be denied by the bank/lender even after the final approval and signing of the documents.
Banks are less likely to revoke your loan after approval unless there is a serious error in the contract that has been drawn up. However, dealerships are more likely to revoke an approved loan if they have ‘spot delivery’ or ‘yo-yo financing’.
Reasons for the car loan being denied after approval
There are two main reasons why a car loan could be denied after approval:
- If there is a discrepancy/incomplete information: Sometimes, there could be an oversight on the part of the processing team. They could approve you for a loan despite there being glaring issues in your financial history. With banks, errors in the drafted contract can also be cause for loan revocation after approval.
- If you financed the loan through ‘yo-yo’ financing: Also called ‘spot delivery’, it is pretty common in car dealerships. The dealer will take a look at the customer’s profile and sign them on for a loan on the assumption that it will be approved. The buyer may drive the car off the lot, only to realize a few days later that the loan wasn’t approved by the lender. The dealer has to notify you within 10 days whether the loan has been approved, or else you’ll have to turn it in.
What should you do if your auto loan is denied after approval?
- Read the contract to make sure the bank/ dealership is within its rights to do so.
- Turn the car in: If you’ve already purchased the car through ‘spot delivery’, the dealer may be hounding you to turn it in. If you’re quick with it, you may be able to do so with minimal cost. You will get your downpayment and trade-in value back, but not the other dealership charges involved in the purchase.
- Pursue the lender for breach of contract: Even banks and car dealerships can make mistakes when drawing up contracts. If they made such an error and wrongfully denied you a loan, you can take them to court and at least recoup your finance charges.
- Accept a new pre-approved offer from a different lender: Pre-approved offers are usually valid for 30-60 days. If you received several pre-approved offers previously, you can always apply to obtain fresh financing. You can use finance platforms like Way.com to get multiple offers in minutes.
What Not to Do When Your Approved Car Loan is Revoked
- Do not accept your situation and do nothing. Ignoring it will only lead to your car being repossessed and you could also lose out on all the purchase costs you had to make.
- Do not threaten or use violence against the dealer. That will only escalate the situation and invite a lawsuit.
How to improve the chances of auto loan approval
To have a smooth auto loan approval process from start to finish, follow these guidelines:
- Build your credit profile to a good level before applying. Ensure you rectify any inaccuracies.
- Have a consistent payment history for at least the previous year.
- Make sure that you have a stable and reliable income source.
- Don’t apply for any new credit cards or make large purchases using them.
- Before signing the contract, check for the “seller’s right to cancel” and read it carefully.
Frequently Asked Questions (FAQ)
Can an auto loan be rescinded?
Yes, an auto loan can be rescinded after approval in rare cases if there is incomplete information, errors in the contract, or if you chose spot delivery from a dealership.
Will a bank cancel a loan after approval?
While it is very rare for banks to cancel a loan after approval, it has happened occasionally due to errors in the contract and incomplete information on the buyer’s side.
Can a dealership go back on a deal?
Under the “seller’s right to cancel,” dealerships can sign you on for a loan and then look for a lender to approve you within a certain number of days. If the loan isn’t approved, they have the right to cancel the deal. This is also called ‘spot delivery’ or ‘yo-yo financing.’
Can you back out of buying a car after signing papers?
Different states have different conditions for when you can back out of a car purchase after signing papers. For example:
- In Texas and Rhode Island, you can back out if you’ve signed the papers but haven’t driven the car off the lot.
- In Alaska, you can return a ‘lemon car’ – one that has a string of problems that cannot be solved by the seller even after three repair attempts.
- Active-duty service members can back out of buying a car under the Service Members Relief Act (SMRA) if they’ve been deployed overseas while financing a car.
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