Last updated:
June 19, 2024
Written by
Claire Fürst

Why Have I Been Declined for Car Finance?

So you have been rejected for car finance, but are not sure why? Ozoomi’s here to help! We want to touch on the key reasons why people get rejected for car finance and go one step better - we will give some advice as we go through them, to help you work on turning the rejection into an acceptance.

Credit Score and History

A credit score is a way for credit reference agencies (CRAs) to measure your financial health. It's a three-digit number that indicates to lenders how good you are with money.

Late or Missed Payments

Your payment history is a major part of your credit score, making up over a third of it. If you find yourself often making late payments or missing them completely, this signals to lenders that you might not be reliable in managing your money or are in financial difficulty.

Example: Missing just one mortgage payment can dramatically lower your credit score. This is especially the case if you have a good credit score to start with because it’s unusual behaviour and may indicate you are overstretched financially. This sudden drop in score can take a long time to fix as it remains visible on your credit file and might make lenders wary about lending money.

No Credit History

If you don’t have a credit history, lenders have a hard time figuring out how risky it might be to lend you money. Without past financial behaviour to look at, they can't tell how likely you are to make payments on time. This is often referred to as credit invisibility.

Examples: A young person is just starting out on the credit ladder, or someone who has just moved into the country. Both have not previously used credit in the UK, so do not have a credit score. This makes it tough for lenders to decide if they should give them a loan, because they don't know how they behave with money.

Errors on Your Credit Report

If there are any mistakes on your credit report, like wrong information about your credit limits or payments, it can unfairly lower your credit score. Errors like these can make you look less ‘creditworthy’ than you actually are - so you are less likely to get a loan.

Example: If your credit report mistakenly shows an account as open and overdue when you’ve already closed it or are up to date on payments, this can make your score plummet. It’s important to regularly look over your credit report and quickly challenge any mistakes or inaccuracies you find with the creditor.

Credit Utilisation

Credit utilisation shows how much of your available credit you're using. Using a high percentage of your credit limits can indicate to lenders that you rely too much on credit, and this can impact your credit score. Just because you have an amount of credit available, doesn’t mean that you should use it all up!

You might hear the terms ‘individual utilisation’ and ‘aggregate utilisation.’ This is just a way to say that lenders will look at how much of the limit you are using on individual sources of credit, as well as across all credit lines combined (‘aggregate utilisation’).

If lenders see that the number of credit lines or credit utilisation has increased over time, this can be a lender's ‘red flag.’ The more credit used, the more financial stress is indicated.

Example: If you have a total credit limit of £1,000 and you're using £900 of it, your credit utilisation is 90%. This is much higher than the limit of 30% or under that lenders typically prefer to see, in this example, it would be £300 against the £1000 credit limit.

Multiple Credit Applications

This point focuses on the number of credit applications you make. If you apply for several forms of credit in a short period, you may get multiple hard inquiries on your credit report. Each of these inquiries can slightly lower your credit score. More importantly, because lenders can’t see if your application was successful, it can make you seem desperate for credit, which indicates that you are financially stressed and may struggle making payments.

When applying for credit it’s important to check whether hard or soft credit searches are being carried out at the application stage.

Example: If you apply for several credit cards over a few months, each application likely results in a hard inquiry.

Use of Short-Term, High-Interest Loans

If you find yourself relying on short-term, high-interest loans, be aware that these are seen by lenders as clear indicators of financial distress and emergencies, or an unsustainable financial lifestyle. This reduces your chances of getting a credit offer.

Legal and Financial Conduct

Impact of CCJs, Defaults, Bankruptcies, IVAs and DROs

1. County Court Judgements (CCJs)

CCJs are issued when someone fails to repay money that is owed and a court has intervened to mandate repayment. CCJs remain visible on your credit report for at least six years so it’s important to make sure that your credit file is updated when you have paid back the debt so that the CCJ is shown as settled.

2. Defaulted Payments

A default occurs if the lender decides to close your account because you’ve missed payments. A default can occur regardless of how much money you owe, whether it’s a few pounds or a few thousand. It usually happens if you’ve been missing payments over the course of three to six months, but this can vary depending on individual lender terms. If you make a repayment arrangement with lenders they will usually keep your credit file updated showing that the defaulted amount is being reduced. This looks better than doing nothing about it!

3. Bankruptcies and Debt Relief Orders (DROs)

Bankruptcy is a legal status where individuals are unable to repay debts have their financial affairs taken over by a trustee.

DROs are aimed at individuals who have minimal assets and debts under a certain threshold (£30,000) and are unable to repay them. Bankruptcies and DROs stay on your credit report for six years. Whilst your debt may be cleared, your borrowing ability will be affected for at least six years.

4. Individual Voluntary Arrangements (IVAs)

An individual voluntary arrangement is a formal alternative in England and Wales for individuals wishing to avoid bankruptcy. IVAs are formal agreements to repay creditors over a period, typically five years, and also stay on your credit report for six years. It shows a structured effort to resolve outstanding debts.

If you need to take out additional credit whilst in an IVA, there will be restrictions and you should carefully read the terms of your IVA or get in touch with your IVA company.

Employment and Income Stability

Unstable Employment

Lenders have a duty to ensure they have enough checks in place at application stage to prevent putting you into financial difficulty with additional borrowing. It is important that you are truthful on your credit application forms so that they can help you. Consistent and predictable earnings are easier to assess and make it easier for you to make credit repayments when they are due.

Example: Frequent job changes can raise doubts about income reliability.

High Debt-to-Income Ratio

A high ratio shows a large portion of your income is allocated to debt. This indicates that you are likely to have a limited ability to manage additional loan obligations.

Example: An income of £2,000 with debt repayments of £1,000 per month results in a 50% DTI ratio, which is considered risky by lenders as you still have cost of living items to be deducted (food, rent, motoring costs, etc) leaving very little spare income.

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