Auto Loan Rejections on the Rise: What It Means for Consumers

With dealer lots starting to fill back up with product after years of lean inventories that encouraged salespeople to ask for absolutely ludicrous prices, the Federal Reserve has found that lenders are declining would-be borrowers at a record-setting pace.

The reasons for this are many. Annual percentage rates have come up, requiring consumers to pay more money over time that lenders just aren’t certain they’ll see a return on. More people are also defaulting on loans across the board and inflationary pressures are poised to make the issue worse since the dollar just doesn’t go as far as it used to.

Based on new data released by the Federal Reserve shared by Car and Driver, auto loan rejections averaged 14.2 percent in June, up from 9.1 percent in February. That’s a staggering increase in just a few months and the highest level since the Fed started collecting the relevant data in 2013. Though the report does showcase that vehicle-related loan rejections were actually a little lower than the 21.8 percent rejection rate average for all U.S. loans.

Still, it’s hard to turn the above into good news for regular Americans.

From Car and Driver:

“Would-be-borrowers saw their applications for other loan types rejected at an increased rate, too: 21.5 percent of credit card applications were rejected, for example, along with 30.7 percent of credit card limit increase requests, 13.2 percent of mortgages, and 20.8 percent of mortgage refinance applications. The Fed said that the overall rejection rate for all credit applicants was almost 22 percent in June, the highest level in five years. The Fed said all age groups saw an increase in rejections, but the highest rejection rates were among people with sub-680 credit scores.”

“The reasons for the increased rejections can be found in the broader economy, especially the inflation of the last few years and the fact that rising interest rates have increased the amount of debt people have. Lenders are worried about borrowers being unable to pay, with good reason. Analysts at Cox Automotive noted last month that ‘auto loan performance resumed deteriorating in May as delinquencies and defaults both increased for the first time in three months.'”

Considering the number of studies we’ve seen over the years stipulating that the average household can no longer afford a new vehicle, sizable loans are the only way many can procure a fresh automobile. But lenders won’t be happy if there’s a chance they won’t be able to pay it off with interest, and they’re buckling down.

We can blame automakers for prioritizing high-margin vehicles, regulators for ensuring tech and safety inclusions that have made manufacturing more expensive, the government for creating inflation through excessive spending, or consumers for going along with massive loan terms and all of the above.

While things may eventually improve, auto-loan delinquencies remain extremely high and are likely to keep lenders from opening the vault. Cox said delinquencies are the highest recorded since 2006 — right before we had a massive recession and some automakers started seeking bailout funding.

Everyone is assuming that things will get worse before they get better. Over the next twelve months, the Federal Reserve is estimating applicants seeking an auto loan will see rejection rates nearing 30 percent. That won’t be quite as bad as those seeking credit card applicants, increased spending limits, or mortgages. But that’s going to be of little comfort as the broader economy seems poised for a downturn of epic proportions and incomes fail to achieve parity with annual inflation rates.

In conclusion, the rise in auto loan rejections is a concerning trend for consumers. With lenders becoming more cautious due to rising interest rates, inflation, and increasing default rates, obtaining an auto loan has become more challenging. This trend is not limited to auto loans alone, as other loan types are also experiencing higher rejection rates. The broader economy’s instability and the high level of delinquencies further contribute to lenders’ concerns. As a result, it is expected that rejection rates for auto loans will continue to rise in the coming months. This situation highlights the need for consumers to carefully evaluate their financial situation and creditworthiness before applying for loans. Additionally, it emphasizes the importance of saving and budgeting to avoid excessive debt and potential loan rejections.