Rejection rate for auto loans hits all-time high

The number of applicants getting turned down for credit reached its highest level in five years, according to a recent Federal Reserve study.

The rejection rate for loan applications is at 21.8 percent for the past 12 months including June; for automotive loans it was 14.2 percent — a new high — up from 9.1 percent in February.

Rising interest rates and cautious lenders concerned about delinquencies are two potential factors for the steep rejection rates for Americans applying for credit. The increase is across all age groups and highest among those with credit scores below 680.

The high rejection rate for auto loans is a challenge for prospective buyers, and in turn, dealerships.

"Some lenders have become much more cautious in their underwriting practices," said Sam D'Arc, COO of Zeigler Auto Group.

But being rejected may not come as a surprise for some borrowers. That's because an applicant's expectation that their loan would be rejected also is at an all-time high. Almost one-third of hopeful borrowers expected to be turned down for an auto loan.

According to a Federal Reserve quarterly survey of bank senior loan officers, 39 percent of banks polled in April expected to toughen lending at some point between the survey date and the end of the year. Also, 29 percent of banks had tightened their auto loan standards in the three months before the April survey.

"Even if folks think they can make the payment, banks have [payment-to-income] limits," said Jesse Powers, finance director of Oakes Kia in Kansas City, Mo.

Overall, credit applications declined to the lowest level since October 2020. The average reported probability a loan application is rejected rose for all loan types. The probability grew to 30.7 percent for auto loans, 32.8 percent for credit cards, 42.4 percent for credit limit increase requests, 46.1 percent for mortgages and 29.6 percent for mortgage refinance applications. The results for auto loans, mortgages and credit card limit increase requests are new highs.