The rate of auto loan rejections has reached an unprecedented peak, hitting an all-time high in June. According to a recent Federal Reserve study, the 12-month rejection rate for auto loans was 14.2% in June, a significant increase from 9.1% in February.
The rejection rate for all types of loan applications, including auto loans, stands at 21.8% for the past 12 months, further highlighting the challenges borrowers are facing in obtaining credit. This surge in rejections is attributed to some lenders adopting a more cautious approach to their underwriting practices.
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Sam D’Arc, the COO of Zeigler Auto Group, noted the increasing caution among lenders in their underwriting practices. Many lenders seem to be more stringent in their evaluation of borrowers, possibly due to concerns about potential credit risks.
Interestingly, the expectation of loan rejection among applicants has also reached a record high. Nearly one-third of hopeful borrowers anticipated their auto loan applications to be turned down. This highlights the growing awareness among borrowers of the difficulties they may face in securing credit.
Jesse Powers, the finance director of Oakes Kia in Kansas City, Mo., shed light on another factor contributing to the rising rejection rates. Banks often enforce payment-to-income limits, which could lead to rejections even if applicants believe they can manage their loan payments.
The overall trend of credit applications has declined, reaching its lowest level since October 2020. Additionally, the probability of loan application rejection has risen across all loan types. For auto loans, the reported probability of rejection grew to 30.7%, and for credit cards, it reached 32.8%. Credit limit increase requests had a rejection probability of 42.4%, mortgages were at 46.1%, and mortgage refinance applications at 29.6%. All these figures represent new highs, indicating a challenging environment for borrowers seeking various types of credit.
With lenders exercising caution in their underwriting practices and applicants becoming more aware of potential rejections, obtaining credit has become increasingly challenging. The lending landscape remains uncertain, leaving many borrowers struggling to secure the loans they need.
