Would-be car buyers say lenders have been tapping the brakes hard in 2023, according to a new look at consumer access to credit.
A record-breaking share of auto loan applicants say they’ve been rejected for loans this year, according to the Federal Reserve Bank of New York.
Based on surveys collected in February, June and October, an average of 11% of automobile-loan applicants said they had been rejected, the highest yearly car-loan rejection rate since the New York Fed began tracking the figure in 2013.
That speeds past the previous record on car-loan rejections, which was set in 2020, when 7.9% of applicants said they were turned away from a car loan.
The potential potholes awaiting car shoppers were just one part of the New York Fed’s quarterly survey on consumer access to credit. Overall, consumer credit is tightening, the report found. Fewer people are applying to see what terms and rates they could get on cars, credit cards, mortgages and mortgage refinances.
Across the board, reported rejection rates for loans climbed while application rates dropped year to date. The report showed hints of households facing financial pressure.
The share of people seeking to increase the limit on their credit card rose to 17.8% this year, up from 11.2% in October 2022. Nearly one-third of those applicants, 32.1%, reported they were turned away when requesting higher maximums.
The sharpest jumps in applications to increase credit-card limits came from people with lower credit scores, of 680 and below.
Americans amassed $1.08 trillion in credit card debt through the third quarter, New York Fed researchers said earlier this month.
Mortgage application rejection rates decreased between 2022 and 2023, but mortgage application rates fell, too, the credit survey determined. In fact, just 4.3% of survey participants said they had applied for mortgage as of October 2023, a record low for the survey, researchers said. The mortgage application rate was 6.3% a year earlier.
Home buyers say low credit scores and high debt-to-income ratios are some of the reasons they cannot nail down financing these days, according to a recent report from the National Association of Realtors.
Ahead of the holiday shopping season, the numbers on consumer credit stoke ongoing questions about the varied state of Americans’ financial health.
During the third quarter, a “significant” number of banks heightened their standards on credit cards, car loans and other consumer financing, according to the Federal Reserve.
It’s a tough time to be a car buyer
The elevated rejection rate for car loans comes as car shoppers are still coping with car prices that shot up during the pandemic. They’ve come down since reaching record highs in 2022, but remain out of reach for many. The average price of a new car in October was $47,936, according to Cox Automotive. That’s down from $48,606 in October 2022.
On top of high prices, high interest rates can make financing a car purchase an expensive proposition. The share of car buyers with monthly payments that are at least $1,000 hit a record 17.5%, according to data from Edmunds. That tops the 17.1% record set one quarter earlier, Edmunds said. Meanwhile, the average interest rate on a new car loan reached 9.79% in October, according Cox Automotive. For used cars, the average rate was 14.2% last month.
The New York Fed numbers don’t reveal the reasons why applicants are getting rejected for car loans. But the numbers underscore the importance of credit scores.
Nearly 13% of people with credit scores up to 680 said they applied for a car loan, on an annualized basis. That’s edged down from the nearly 15% of buyers in February with these credit scores looking for a car loan.
The 601-to-660 credit-score range is generally considered “poor,” a score between 661 and 720 is considered “fair,” and an “excellent” score is in the range of 781 to 850.