Drivers get denied auto loans for a number of reasons, including a low credit score, application mistakes or a short credit history. No matter the reason, rejection can make getting behind the wheel of a vehicle challenging.
But high interest rates and expensive vehicles have meant application rejections for a much larger number of drivers over the last year. Recent data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations Credit Access Survey revealed an all-time high in rejections: 14.2 percent of surveyed applicants said they were denied an auto loan in the last 12 months. This is the highest percentage of borrowers receiving a no since the Fed started surveying in 2013.
More drivers are getting denied
Drivers getting denied auto loans are not just those with bad credit or insufficient funds. Many have been impacted by economic conditions outside their control. These factors have remained on drivers’ minds since the onslaught of the “new normal” following the pandemic.
Wilbert van der Klaauw, an economic research advisor at the New York Fed, points to a number of factors that have influenced the increase in rejections. “Increased debt burden due to higher car prices and higher interest rates on auto loans could be contributing to a challenging environment for drivers,” he says.
Each quarter, the New York Fed surveys consumers about their experiences applying for credit. In February, the rejection rate for auto loan applicants was 9.1 percent. Since then, it has increased by 5.1 percentage points, according to the Fed survey.
From February to June, the Federal Reserve increased the benchmark rate three times. Though intended to quell inflation, these rate increases have driven auto loan rates higher, negatively trickling down to drivers.
Fed moves aside, drivers have been met with a mix of challenges making securing financing more difficult. One major influence is higher prices. The most recent Kelley Blue Book data reported new cars cost an average of $48,334 in July. This is up from an average of $48,182 one year ago. While the price increase may seem slight, it happened in unison with an increase in interest rates.
Increased rates make financing more difficult
The Federal Reserve increased the benchmark rate for the 11th time this year at the July meeting, up a quarter-point to 5.25 to 5.50 percent. This increase means it’s more expensive for banks to lend money to each other — and lenders tend to pass that cost on to consumers.
A byproduct of the Federal Reserve raising interest rates is that higher auto loan rates and the likelihood of an economic slowdown can make it more difficult for borrowers to qualify or be approved for a loan as easily as when interest rates were lower. This is one of the ways that higher interest rates reduce demand, slowing the economy and easing inflation pressures.— GREG MCBRIDE, BANKRATE CHIEF FINANCIAL ANALYST
While a higher benchmark rate does not directly create higher interest rates for drivers financing a vehicle, the domino effect makes it more challenging. As lenders are met with inflation and more borrowers struggle to afford their monthly payments, many lenders are choosing to adjust their lending criteria and average interest rates to protect themselves against defaults.
Higher debt burden on consumers
All borrowers have financial responsibilities beyond their monthly car payments. Due to a combination of high inflation and higher interest rates, consumers’ debts have increased. According to Experian, the average American held $101,915 in debt in 2022, an increase of 5.8 percent from 2021.
The higher burden of debt that consumers currently face makes keeping up with financial obligations, like auto loans, more of a challenge. But higher debts don’t just squeeze borrowers’ wallets. It also increases the likelihood their loan applications will be rejected.
One reason is the influence of one’s debt-to-income ratio when applying for a loan. This weighs your monthly payments on your credit card balance, loans and other regularly occurring debts against your monthly income. On average, lenders prefer to see a DTI no higher than 45 to 50 percent among borrowers they approve.
Fewer drivers are applying for auto loans
Their June survey found that not only have auto loan rejection rates gone up, the application rate — the percentage of respondents who said they applied for an auto loan in the last 12 months — has gone down.
Those surveyed by the New York Fed were worried about their ability to get credit. Some 30.7 percent of respondents believed that they would be rejected by lenders if they applied for an auto loan in the coming 12 months.
Drivers aren’t the only ones getting denied
While drivers may be feeling the brunt of high-interest rates coupled with high prices, car shoppers are not the only ones having difficulty accessing funds.
The rejection rate for all credit applicants — including those applying for car loans, mortgages, credit limit increases, new credit cards and more — increased to 21.8 percent. This is the highest level since June 2018. While rejections increased across credit bands, borrowers with scores below 680 were hardest-hit.
What to do if you get rejected for an auto loan
While high rates and expensive vehicle prices are out of your control, you have options if your potential lender says no. Consider the following tips if you get denied.
- Contact the lender. Denial does not always occur solely based on your credit — sometimes you just make a mistake on your application. To determine where your issue lies, reach out to your lender and request a reason for denial within 60 days of your application date.
- Improve your credit score. With many lenders tightening their borrowing qualifications, the best thing you can do is work to improve your credit. Small steps like paying down your debts and lowering your debt-to-income ratio will make you much more attractive to lenders.
- Minimize your debts. If you were denied due to a large amount of unpaid debt, paying that down should be a top priority. While you’re chipping away, avoid any new loans or credit cards.
- Look for bad credit lenders. If other steps prove fruitless, borrowing from a bad credit lender may be your best option. But be prepared for higher interest rates.
This article originally appeared here and was republished with permission.
