Here's why your car loan can get rejected in the Philippines

Owning a car is a dream for many and applying for an auto loan is the first step towards the right direction. Though it is quite uncommon for applicants for an auto loan to face rejection, the fact is, it does happen. Therefore, it becomes important to understand the reasons that can lead to car loan rejection in the Philippines. Thus, helping prospective loan applicants improve their loan approval chances.

In this blog, we’ll explore the primary reasons why car loans are rejected in the Philippines, along with useful insights and tips to increase the likelihood of securing an auto loan. But first, let us get a glimpse of how to apply for an auto loan in the Philippines.

Auto loan application process

The process of an auto loan application involves several steps, starting from filling up the application form to submitting the required documents, and then lastly waiting for approval.

Step 1: Check whether or not you are qualified for a car loan. A few prerequisites include - 21 years old, a Filipino citizen living in the Philippines or a foreign resident in the Philippines with qualified Filipino co-borrowers, at least Php 40,000 monthly income/salary, two years of employment or profitable business operation, good credit score, and pre-qualification.

Step 2: Computing how much you can borrow

Step 3: Comparing car loans (based on down payment, length of the loan, and vehicle type & price)

Step 4: Complete car loan requirements (valid IDs, payslip/tax return, ITR, etc)

Step 5: Submission of car loan application

Step 6: Waiting for loan approval & release

Now banks usually take only a few banking days to process and decide on a loan application. If it approves an application, the bank requires the applicant to fulfill the following tasks - sign your loan documents, submit additional requirements, make the down payment and pay other loan-related fees (chattel mortgage fee, handling fee), and get a comprehensive car insurance policy.

However, there are cases where despite thorough preparation, a bank or any other loan provider can reject an application. Knowing the reasons behind these rejections can help borrowers address potential issues before applying, thereby increasing their chances of approval.

Common reason for car loan rejection

• Poor credit score
• Low income
• Unstable employment
• High debt-to-income ratio
• Incomplete or inaccurate documentation
• Age of the borrower
• Type of car
• Overseas Filipino Workers issues
• Regional disparities
• Self-employment challenges

Let us now understand the reasons one by one in detail.

Also Read: Used Car Loan: Top 5 tips to get approval

Poor credit history

One of the most crucial factors in a lender’s decision-making process is the credit history. A poor credit history indicates late payments, defaults, and bankruptcies. It is a signal to the lender that the borrower is a high-risk candidate. Talking specifically about the Philippines market, here the borrower's credit scores are becoming increasingly important, with more banks and lending institutions relying on the info to assess creditworthiness.

Low income

Lenders require proof of a stable and sufficient income to ensure that the borrower can repay the loan. If an applicant's income is too low or irregular, lenders often question their ability to make consistent payments. This is especially true in cases where the applicant's monthly income does not meet the lender's minimum requirement.

Unstable employment history

The fact of the matter is lenders prefer borrowers with stable employment histories. Frequent job changes or periods of unemployment indicate instability and may lead to loan rejection. A stable job, typically with the same employer for at least a year, is often seen as a sign of reliability by the lender.

High debt-to-income ratio

When the debt-to-income ratio is high, it suggests that the borrower has too much debt relative to their income, thus making it challenging to take on any more financial obligations. Lenders assess this ratio to ensure that borrowers are not over-leveraged and can manage their loan repayments without any financial strain.

Incomplete documentation

Whenever a borrower submits incomplete or inaccurate documentation to a borrower, it leads to immediate rejection. In the Philippines, lenders often require a comprehensive set of documents, including proof of identity, income, employment, and residence. Any discrepancies or missing information can result in the application being denied. So, do keep a note that all the required paperwork is complete and in order.

Age of the applicant

In the Philippines, lenders often have age restrictions for loan applicants. Mostly borrowers should be between 21 and 65 years old at the time of loan maturity. Applicants outside this age range may face difficulties in securing a loan.

Type of car

Another factor affecting the loan application approval is the type of car the loan is getting secured for. For instance, lenders often hesitate to finance older vehicles or cars with high mileage due to the increased risk of depreciation and mechanical issues. Additionally, luxury cars or imported vehicles have strict finance criteria.

Overseas Filipino Workers (OFW) challenges

Overseas Filipino Workers (OFWs) often face challenges when applying for car loans in the country. While their income might be substantial, the lack of a stable employment history in the Philippines can be a hurdle. Additionally, the difficulty in tracking and collecting payments from borrowers based overseas put OFW under the scanner.

Self-employment challenges

Unlike salaried employees, the earnings of a self-employed person can fluctuate significantly, making lenders wonder about their ability to make consistent loan payments.

Regional disparities

Access to car loans can vary significantly across different regions in the Philippines. Applicants from rural areas or less economically developed regions may face scrutiny or limited lending options compared to those in major cities like Manila.

Tips to avoid loan rejection

1. Improve your credit score

Improving one’s credit sc hore is very important for loan approval. Here are some tips to enhance your creditworthiness:

• Pay bills on time: Ensure all bills, including credit card payments and utilities, are paid promptly.
• Reduce outstanding debt: Lower your credit card balances and pay off loans.
• Monitor your credit report: Regularly check your credit report for errors and dispute any inaccuracies.
• Avoid opening new credit accounts: Minimize new credit inquiries, as they can lower your credit score.

2. Stable income

Make sure when applying for an auto loan you can demonstrate a stable income flow. This can be done via -

• Maintaining a consistent employment record: Stay with your current employer for a significant period before applying.
• Providing comprehensive income documentation: Include pay stubs, employment certificates, and bank statements.
• Showing a supplement income from additional sources: Show other income streams, such as rental income or part-time jobs.

3. Minimising debt-to-income ratios

All lenders should manage their debt-to-income ratio which can be done via -

• Pay down existing debts: Prioritise paying off high-interest debts.
• Increase your income: Take on additional work or find higher-paying opportunities.
• Avoid new debts: Refrain from taking on new loans or credit card debt before applying.

4. Maintaining proper documentation

A borrower should ensure all necessary documentation is in order and complete. Here are a few pointers to help -

• Gather all required documents: These may include IDs, proof of income, proof of residence, and employment certificates.
• Double-check for accuracy: Verify all information is correct and up-to-date.
• Organise documents: Submit a well-organized set of documents to avoid any confusion or delays.

5. Consider the type of car

The type of car you are planning to purchase largely impacts whether or not your loan will get approved. Here are some tips -

• Choose a new vehicle: Lenders are more likely to finance new or relatively new cars.
• Research lender preferences: Some lenders may have specific criteria for the types of cars they finance.
• Consider a certified pre-owned vehicle: These cars often come with warranties and have been inspected, making them more attractive to lenders.

Bottom line

Understanding the reasons why a car loan application can get rejected in the Philippines can help prospective borrowers get better prepared. By addressing issues related to credit history, income stability, debt levels, and documentation, applicants can present themselves as reliable and creditworthy borrowers.

Also Read: How to budget for your car loan repayment effectively