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Auto Loan Rejection: Great Credit, but Insufficient Credit Mix

A friend of mine from Southern California (let's call him Alex) recently left me a voicemail claiming to have a few questions about credit. When I caught up with Alex a few days later, he was quite upset because he had just been rejected for an auto loan from the national bank he's frequented for years.

He had his heart set on purchasing this car, and he just couldn't figure out why the bank would decline his loan. He even tried a different bank where he had some family connections; however, the result was the same - declined due to "insufficient credit mix".

"What does this mean? Isn't my income and good credit score enough to qualify me for the loan?", he asked.

To gain a better understanding of his financial situation, I responded with a few questions of my own before answering. Here's what I learned.

Alex is married, in his late twenties, boasts a 780 credit score, and has a good job in the dental profession. He has one credit card, uses it to pay for everything that he possibly can, and he rarely carries a balance. Unlike most people his age, he has never had any debt. No credit card debt, student loans, auto loans, home loans, or equity lines of credit. He's always paid for his cars in cash, and he's currently saving for a down payment to buy his first home within the next few years. Unless he wins the lottery, he expects that won't be an all-cash deal.

The used car he wanted to purchase was in the $15,000 range, and he planned to make a $5,000 down payment while financing the remaining $10,000. Let's just assume the interest rate for this loan might have been 4.99%. If so, the monthly payment for a 48-month auto loan would be $230.25. Given his current debt to income ratio, he should have been able to easily qualify for this loan. However, the answer was still a "no" - twice. Why?

I explained to Alex that he shouldn't be too worried, and he certainly shouldn't give up on his hunt for an auto loan. We then discussed how "insufficient credit mix" essentially means the bank's underwriters want to see more proof that he has experience handling multiple types of credit before they will be ready to lend him any sum of money.

He may have a great credit score and good income, but since his credit reports don't include a history of other installment loans, such as a car or home loan, it's unfortunately not enough these days. In a way, Alex was being penalized for the fact that he's tried to live within his means and only buy big-ticket items that he can afford to pay for in cash. As a result, he basically hasn't had enough debt to prove that he's a good credit risk.

My recommendation to Alex was to approach a local credit union regarding his loan before going to another large bank. While less than one in five auto loans are made by credit unions, they are becoming increasingly popular due to their competitive rates, low-cost loans, and the ability to make quick underwriting decisions at a local level. Throw in the fact that they haven't literally forgotten how to say the words "Yes, you're approved", like many larger banks, and credit unions can make a great alternative option for your financing needs.

Just a few days later, Alex sent me an email to let me know that he had been approved for his auto loan by a local credit union. The process was apparently quite smooth, and he was able to speak directly with the individuals working on his loan regarding his lack of a sufficient credit mix.  The personal level of service was something he had never experienced before with a larger bank, and he was very impressed by the speed at which the loan process progressed.

Hopefully, this will be the last time Alex has to deal with a rejection due to insufficient credit mix. The new auto loan, in conjunction with a few new credit cards and his excellent credit history, should put him in a great position to qualify for the home loan he'll need in just a few years.

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Joshua Heckathorn's picture

Joshua Heckathorn is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past twenty years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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Chris's picture

I am enduring the same situation. I am 23, make $33,000+ a year, and want a $14,000 auto loan. I even used my mother and grandmother (who have an excellent credit history), and was unable to get a loan. I am going in person to my local bank and seeing if I can talk to them in person, show them my income and monetary history, etc. Hopefully inperson rather than over the phone will prove to them I am responsible enough to get this loan.

Joshua Heckathorn's picture

Sorry to hear about your situation Chris. Please come back and let us know how the discussion goes with you local bank, and good luck!

Remember, the old rule of thumb is that your total consumer debt payments shouldn't exceed 38% of your gross income. That would be $1,045 for you. I'm not sure what other debts you have or could have in the near future, but keep that in mind as you search for you loan.