Auto loan rejection rates spike this summer

There are many reasons why auto loan applications get denied, like low credit scores, limited credit history, or application errors. Yet, the elevated costs of borrowing on top of high vehicle prices, have caused the auto loan denial rate to spike – making it that much tougher for consumers to get behind the wheel.

Driving the news: According to the latest data from the New York Fed, 19% of would-be auto loan borrowers were turned down during the 12 months ending in June.

• Rejection rates have jumped 5% jump year-over-year despite the rate of applications staying flat. 

• This is the highest percentage of denied borrowers since the Fed started surveying in 2013.

• One reason behind the spike could be an increase in applications from lower-tier credit borrowers (<680 FICO) which rose 6% against last year. As lenders grapple with inflation and rising defaults, they are less inclined to extend credit to riskier borrowers.

Why it matters: Consumers facing a higher debt burden are finding it more difficult to meet their financial responsibilities, including auto loan payments. This can increase the likelihood of loan applications being rejected, as lenders often consider a borrower's debt-to-income ratio which evaluates monthly payments on credit cards, loans, and other debts in relation to income.

Looking ahead: Fewer borrowers expect to apply for auto loans in the next 12 months—9% compared to 11% last year—but a smaller share also anticipates being rejected, dropping to 29% from 31%.

What’s next: The latest minutes from the Federal Reserve meeting suggest that the central bank is leaning towards an interest rate cut on September 18. This aligns with what financial markets have been anticipating, as inflation slows and the labor market weakens.

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