Can a Car Loan Be Denied After Approval?
Understanding the fine print of your car loan approval helps you avoid surprises.
You may have heard an alarming story of a friend driving a new car home only to get a call to bring it back to the dealership because a loan didn't go through. Can a car loan be denied after approval? Though rare, it is possible to believe you are fully approved and learn later that your car loan was denied after purchase.
The good news is that car loan denials after approval are indeed very rare, and the reason they happen at all is tied to the fine print of a contract. Your best way to avoid this outcome is to always clarify the loan or approval status before you drive the car off the lot. That way, you can rest assured knowing that your car loan is all set and moving forward.
Understanding Dealer and Lender Financing
To help you better understand the factors behind why a car loan approval could be denied after the fact, let's first cover what approval really means in a few different contexts.
Lender financing is almost always dependent on certain factors. You may be approved for a certain amount for a loan, but nothing higher than that amount. Some cars, such as much older cars, may not be eligible for financing at all. You can talk to your lender — whether it's a bank or credit union — and ask specifically which kinds of cars or loan amounts fit into your approval.
With dealer financing, you may or may not actually finish the paperwork on the car loan while you are sitting in the office. Sometimes dealerships issue the loan themselves, but other times they will shop your credit application around to preferred lenders. They know the typical profile of what it will take to get an approval. However, in rare cases, you could be denied for a car loan after the dealer thought they could get you the loan. This is called "spot delivery." For this reason, you'll want to confirm whether your car's loan is finalized and funded when you take possession of the car.
Contexts Where Car Loan Approval Could Be Denied After the Fact
When you receive a notice sharing news of a car loan denied after purchase, it's tempting to worry. But before you worry, this situation can be resolved with a little more information.
Misunderstanding or clerical errors
You may wonder: can a car loan be denied after approval because of an error? It's possible that you could have a typo on your forms, such as your credit score or other key information. This can result in an incorrect denial of funding. If you receive a loan where they missed an inaccuracy in your application, they may discover the problem later when they are verifying the loan after your purchase. Misunderstandings do happen and can often be resolved.
Spot delivery or other financing streamlining
One of the sources of car loan denial after purchase is a practice known as spot delivery. This is an option at the dealership where you apply for financing and drive away with the vehicle immediately — even though the financing isn't formally approved. If the salesperson believes your credit score and other details point toward approval, they may move forward and let you take the car home with the deal still pending. Typically, they don't want to lose the sale by making you wait longer, especially since lenders could be closed at night, on weekends, and/or holidays.
Both the lenders themselves and the dealership will gather information about your financial situation. Usually, the dealership representative will gather very similar details to what the lender wants, but their processes aren't always identical. In rare cases, a lender's more detailed process uncovers something that causes a financing denial. This would explain why you could get a call to bring the car back and discuss alternative financing opportunities.
Spot delivery and other ways to take possession of a vehicle before financing is complete are intended to benefit customers. After all, it's convenient to drive away in your car without waiting for every bit of paperwork to clear. Alternately, if a salesperson recognizes the unlikelihood of your approval but sells you the car anyway, they may think you'll get attached to the car and potentially agree to different — and possibly more expensive — terms after the initial terms are denied. Most salespeople won't do this because it is unethical, but it has happened.
If you are applying for financing on the same day that you want possession of your vehicle, clarify whether the loan is officially originated yet or if the loan will take time to approve. If it is the latter, you can still choose to take the car that day, but it's wise to follow up and ensure the loan is approved before you assume the deal is complete.
Misrepresentation in the application
Mistakes happen. However, lenders won't honor a loan approval if they discover that you didn't give them the full truth on the application. Even if the misrepresentation was unintentional, such as a typo in your application, the loan could still be denied. This is a great reason to double-check your application before applying.
What to Do If Your Car Loan Is Denied
It can be very helpful to inquire your from lender or dealer about the circumstances. In the short term, you can ask about alternative financing and determine whether you qualify for a slightly different loan. In the long term, you can use the information about aspects of the denial, such as your credit score, and work to improve your situation to qualify for a loan in the future.
This information shouldn't make you assume that all car loan offers are in danger of denial after approval. Instead, you can commit to careful accuracy in your application and get clarity on the status of your loan as two steps that can boost your confidence in the car purchase process.