Getting a car loan has become harder than ever

More Americans are being rejected for a car loan than ever before.

According to the New York Fed, the rejection rate for auto loans spiked to 14.2% in June—the highest since record-keeping began in 2013. For comparison, the rejection rate was just 9.1% in February.

Auto loan rejections could get much worse very soon.

The Fed said the average reported probability that a car loan application will be rejected has increased to 30.7%—also the highest in the survey’s ten-year history.

The troubling stats don’t end there.

The used car market, which accounts for more than half of total vehicle sales, is experiencing a more severe credit crunch.

“The availability of consumer credit in the used market is going to feel tighter in a way it doesn't in the new market,” said Pat Ryan, CEO of auto listing website CoPilot.

This is a problem for the 73% of American commuters who use their own automobile to get to work—and who may need an upgrade in the coming year.

As much as car dealerships want to sell cars, lenders are pulling back because they see the writing on the wall: The average American has bitten off more debt than they can chew.

Why lenders are pulling back

Lenders are being extra cautious with extending auto loans to cash-strapped Americans.

The Fed has hiked interest rates 11 times in 17 months. As interest rates go up, borrowing costs are passed on to the consumer.

Average interest rates on 60-month auto loans reached 7.4% in August, according to Statista. Rates for the same term were less than 4% in December 2021.

Credit card delinquencies are through the roof, yet Americans keep borrowing.

The average consumer carries nearly $6,000 in credit card balances, according to credit rating agency TransUnion. Americans owe more than $1 trillion in credit card debt—the highest on record—according to Fed data.

Major banks see greater risks in the consumer credit market and are preparing accordingly.

JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America have all said they’re setting aside more money to cover bad consumer loans. Defaults are expected to spike if the economy enters a recession.

Goldman Sachs recently lowered its recession odds for the next 12 months, so that could be a silver lining. But that all depends on inflation moderating and the job market remaining strong.

Although jobs remain plentiful for now, wage growth has barely kept up with inflation. Americans are also less productive than they were decades ago. This suggests consumers can’t depend on rising wages to offset higher borrowing costs for vehicles and other goods.

It’s not just auto loans

Auto loan rejections are only the tip of the iceberg, the New York Fed explained in its report.

Applications for all sorts of loans are seeing much higher rejections because of interest rates, consumer debt, and the economy.

Based on June data, lenders rejected 21.5% of credit card applications, 30.7% of credit card limit increase requests, 13.2% of mortgage applications, and 20.8% of mortgage refinance applications.

This impacts consumers’ access to cash when they need it most.

As the Fed resumes its inflation fight, economists don’t expect interest rates to decline anytime soon.

Long-term interest rate expectations remain above 3-4%. Many economists see this as the “sweet spot” for keeping inflation in check without severely limiting consumers’ access to credit.