As more cars become available and prices stabilize, car buyers are facing hurdles in securing auto loans due to rising rejection rates and tighter lending standards.
08/01/2023 2:35 P.M.
2.5 minute read
Car buyers are finally witnessing an improvement in the availability of cars and a leveling off of prices, according to a recent article from USA Today. However, they now face significant borrowing challenges that may hinder their plans to get a new ride.
According to the Federal Reserve, the rejection rate for auto loans surged to 14.2% in June, up from 9.1% in February, signaling the highest level since data collection began in 2013 and even surpassing the application rate for the first time.
Lenders have become more cautious as well, particularly with borrowers who have struggled with high inflation and increased interest rates over the past few years. Many consumers have accumulated debt to make ends meet, resulting in a higher chance of loan default, especially in the auto financing market. Notably, a record number of Americans, just over 17%, have been paying at least $1,000 a month on new auto loans in the three months leading up to June 2023.
Deteriorating auto loan performance is evident as the severe delinquency rate in May reached its worst level since data collection began in 2006, and the default rate rose to levels similar to those seen in 2019. A significant concern is that consumers paying substantial finance charges are at risk of falling into a negative equity trap, where the amount owed on the vehicle surpasses its value, according to Ivan Drury, director of insights at Edmunds, the online car resource and information company.
Some lenders, including Fifth Third Bancorp, Citizens Financial, U.S. Bank, and Capital One Financial, have already reduced their auto lending or completely cut it out. This reduction in lending options could lead to higher interest rates and leave some potential buyers ineligible for financing, further impacting their ability to purchase the car they desire.
“Consumers are already under pressure, and they’re even worse off because banks are reducing their lending,” said Alex Liegl, chief executive at electric vehicle financing company Tenet. “If there are fewer options, interest rates are going to further increase for customers. Typically, sometimes, they won’t even qualify for financing, so they’re shut out from getting the car they want.”
The Fed said the average reported probability that an auto loan application will be rejected increased sharply to 30.7%, the highest level since the Fed started collecting this data in 2013, according to the article.
What Can Consumers Do?
Consumers looking to buy a car are likely to face an uphill battle with increasing auto loan rejection rates and tighter lending standards. According to auto experts, it’s crucial for buyers to approach their purchase with a comprehensive budget and consider all financing elements beyond just the monthly payment and APR. Rather than extending the loan term to lower monthly payments, buyers should focus on making a larger down payment or opting for a more affordable car to avoid excessive interest payments.
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