Having your car loan application rejected by the bank can be disheartening, especially if you really need it for essential travel like daily commuting. However, it doesn’t mean that you have no chance of successfully applying for another loan. By understanding why your car loan was rejected, you can take steps to rectify your issues and improve the approval chances of future loan applications.
Here are the common reasons why car loans in Malaysia get rejected and what you can do to get your application approved.
Identify Why Was Your Car Loan Rejected
Firstly, it’s important to identify why your loan application was rejected before applying again. Different banks may have different requirements when you apply for a car loan in Malaysia. So if the bank did not give you any reason for the rejection, it’s a good idea to ask your banker or salesperson, and they should be able to find it out for you. Here are the most common reasons for your application to be denied.
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Poor or No Credit Score
A credit score refers to the Credit Tip-Off Service (CTOS) score that ranges between 300 and 850. It represents your creditworthiness and the likelihood that you will repay your debt, and is widely used by banks when assessing your loan application be it a property mortgage or car loan in Malaysia. CTOS obtains credit-related information from public sources such as the National Registration Department and the Malaysia Department of Insolvency to determine your credit score.
Image source: CTOS
Some information that CTOS looks at when calculating your credit score includes your payment history, other loans that you have, and your legal track record. While having a poor credit score is bad, not having one is equally damaging to your loan application. Without a credit score, the bank can’t assess your creditworthiness and is less likely to give you the green light, even if you earn well.
Income Issues
Most of the time, people think their applications get rejected due to insufficient income. However, your car loan can also be rejected if your income is irregular and hard to prove.
For instance, you may be a self-employed contractor who gets paid directly by your clients, makes good money, and may not have payslips or proper documentation of your income. In this case, you might need to provide proof of income and bank statements for the previous year, as requested by your lender. If your statements don’t match your claimed income, there’s a high chance of your application being denied.
Let’s say you’re a salesperson who relies on commissions, the lender might request several months’ worth of payslips to confirm that you’re getting a steady income. If your income looks sporadic, you might get rejected.
High Debt Service Ratio
The debt service ratio (DSR) is the ratio of your debts to your household income. Basically, it’s a measure of how much you owe compared to your income each month. Lenders use this ratio to determine if you can stay on top of your payments upon approval of your loan. Here’s how to calculate your DSR.
If your DSR is too high, your car loan application is more likely to be declined. Most banks prefer you to have a DSR of 30 to 40 percent before approving your loan, though some may have a higher DSR limit.
Incomplete Documents or Information
When you apply for a car loan in Malaysia, you’ll need to provide various documents and information to the lender including your address, payslips, bills, and bank statements. This is mostly to prevent fraud and determine if you are a genuine applicant.
Each lender may have its own requirements regarding how you submit the information and in what format. If the information you provide doesn’t match your documentation or is incomplete, there’s a higher chance of your application being rejected.
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You Have Too Many Pending Loan Applications
It’s common for buyers to “shop around” and apply for multiple car loans at once to have a higher chance of securing a loan. However, this practice can actually backfire and cause your applications to be rejected.
When banks assess your car loan application, they can check to see if you’ve applied for other loans. And while there’s nothing wrong with applying for multiple loans, having too many applications on your name may raise red flags on your authenticity. Keep your applications to two to three lenders at a time to avoid this risk.
Short-Term Strategies to Secure a Car Loan
Once you have identified the reasons why your car loan was rejected, you can come up with a plan to improve your credit score and make it easier for you to secure loans. Here are some short-term actions you can take that can make your application look better and may even help you score a loan.
Get Pre-qualified with Other Lenders
When you get pre-qualified for a loan from a particular bank, you can know the loan amount and interest rate you are eligible to get from that bank. You can use this information to help you choose the car that better suits your finances or even negotiate with other banks. Getting pre-qualified doesn’t involve locking in the rates and terms though, and they might change if you leave too much of a gap before finally applying for the loan. To find out how much you can pre-qualify for, simply visit a bank and enquire about how much you can borrow based on your credit score.
Get a Guarantor
A guarantor is someone who is obligated to pay any outstanding debt if the principal borrower of the loan (the applicant) defaults on the loan. By having a strong guarantor in your loan application, you’re more likely to succeed in your application, as you can show the bank that you have a safety net in terms of paying back the loan.
Just like how the bank assesses you, the borrower, it will also assess the guarantor’s income, credit score, DSR, and more when reviewing your application. If the guarantor’s creditworthiness is acceptable, you have a much better chance of having your car loan approved.
Remember that having a guarantor is not a ticket to buy a car without paying the loan. You should only choose a car that you can afford, so as to avoid defaulting on your loan and burdening your guarantor.
Increase Your Down Payment Amount
If the issue is that your loan amount is too high, you can most probably fix it by reducing the loan amount you’re applying for. And one way to do that is to pay a larger down payment on the car. If you can’t acquire the amount you need immediately, you might need to save for a few extra months to accumulate the necessary down payment. That being said, if you require a car urgently, it might be a better idea to consider cheaper options, such as a pre-owned car.
Apply from Other Lenders
Being rejected by one bank doesn’t mean that all banks have the same view of your creditworthiness. It might just mean that you don’t suit the specific requirements of that particular bank. If you believe you have good finances and have done everything you need to improve your credit score, you can approach two or three other lenders to apply for a car loan.
Long-Term Strategies for Future Loan Applications
If your car loan rejection is due to your financial profile, you may need to spend more time improving it before you can successfully apply for loans. Here are some long-term strategies you should take to make it easier for you to borrow in the future.
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Improve Your Credit Score
A good credit score is important to help you secure loans, and there are several ways to improve it.
- Build credit history: If you don’t have existing loans or credit cards yet, it’s a good idea to apply for a credit card to build your credit history. Just remember to pay the credit card charges on time every month. You can also apply for other types of loans and be punctual with your payments. Over time, these will help improve your credit score.
- Get up to date with payments: If you are behind on payments on your credit card or other loans, you should do your best to get up to date with them. While it can be challenging to settle your outstanding debt, you can try to allocate more money each month to bring your account payments up to date. You can also contact your lenders to work out a new payment plan or do a balance transfer of your existing debt.
- Reduce your debt: Any existing loan you have affects your DSR. By reducing your debt, you’ll improve your DSR and free up more income which you can use to pay for a new loan. If you have existing loans, you can pay them off in a lump sum and reduce your overall debt. You can also refinance your existing loans if there are more affordable loans on the market with lower interest rates.
Increase Your Income
The next best thing you can do for your creditworthiness is to increase your income. That may be easier said than done but it’s important to think about especially if you plan on purchasing property, upgrading your car, or saving up for your kids.
If you foresee that there will be major changes that can reduce your income, such as starting a new career or furthering your education, it’s best to have your loan approved first and then set up a plan for paying off your loan before starting your new venture.
Choose CARSOME for Quality, Affordable Cars
If you’re looking for a quality car, check out CARSOME. We put all our cars through a 175-point inspection to rule out major accident and flood damage, and even professionally refurbish them inside and out.
We do all this to give you safe, reliable cars at affordable prices. To help you finance your dream car, we can even help you with your car loan to ensure you get the best loan possible.
Not only that, all CARSOME Certified cars come with fixed prices with no hidden fees, a five-day money-back guarantee, and a one-year warranty for extra peace of mind.
Visit CARSOME or download our mobile app from the Google Play Store or Apple App Store to find your dream car today!
