Car Loan Approvals Tougher to Get as Lenders Tighten Requirements

Getting approved for an auto loan is becoming increasingly difficult, with rejection rates at their highest level in years. Tighter lending standards mean more consumers are getting turned down when trying to finance a new or used car purchase.

Several factors are causing lenders to be more selective about handing out loans. Here's an in-depth look at the rising rejection rates and what's behind the trend:

Highlights

  • Auto loan rejection rates hit 14.2% in June 2022, up from 9.1% in February
  • Highest rate since Federal Reserve started tracking data in 2013
  • Lenders worried about inflation, rising interest rates, and growing delinquencies
  • Borrowers with sub-680 credit scores facing highest rejection likelihood
  • Expected future rejection rates also increasing across all loan types

Surging Refusal Rates for Car Loan Applicants

Federal Reserve data shows a sharp jump in denied auto loan applications this year.

The rejection rate leapt to 14.2% in June 2022, compared to just 9.1% in February 2022.

This represents the highest share of rejected applications since the Fed began compiling the stats in 2013.

It signals lenders are applying greater scrutiny and tightening approval requirements for would-be borrowers.

Why Are Lenders Rejecting More Applications?

Several macroeconomic factors are causing lenders to be more selective:

  • Inflation - Reduces disposable income to cover loan payments
  • Rising interest rates - Increase monthly payments on new loans
  • Growing delinquencies - More borrowers falling behind on existing loans

Additional headwinds like high gas prices and grocery costs make lenders hesitant to take risks on applicants with shakier finances or lower credit scores.

They want to mitigate future losses from borrowers defaulting as household budgets get squeezed.

Borrowers With Lower Scores Most Affected

Applicants with sub-680 credit scores are experiencing the highest rejection rates across all age groups.

This demographic is viewed as higher-risk by lenders in the current economic environment. Default rates have been climbing.

However, prime borrowers aren't immune either. Standards have tightened across the board, although rejection rates for prime buyers haven't increased as sharply.

Basically, the bar to get approved is now higher for all tiers of buyers hoping to finance a car or truck.

Expected Future Rejections Also Rising

Looking ahead, lenders anticipate refusal rates will remain elevated in coming months.

The Federal Reserve data showed:

  • Auto loan rejections expected to be 31% over next 12 months
  • Mortgages seen getting rejected 46% of the time
  • Credit card application refusals forecast at nearly 33%

This pessimistic outlook suggests lending criteria will remain stringent in the near term. Applicants will continue facing an uphill battle getting approved.

Steps To Improve Your Chances

If you need a car soon, here are some tips to boost your odds of loan approval:

  • Boost your credit score - Pay down balances, dispute errors
  • Increase down payment - At least 20% ideal
  • Reduce requested loan term - 48-60 months looks best
  • Clean up your debt-to-income ratio - Lenders may require below 36% DTI
  • Bring a co-signer - If you have marginal credit

While approvals are harder to come by, being proactive improves your prospects.

FAQs

What are some reasons for getting rejected?

Low credit score, high debt levels, low income, and limited credit history are common reasons applicants get denied.

Will lending standards loosen up again?

Possibly, if inflation and delinquencies show sustained improvement. But likely not in the next 6-12 months.

How high should my credit score be?

Many lenders now require 720+ for approval. Ideal is 740+ for the best rates.

Should I wait to apply for better odds?

If you need a car soon, build your case (improve score, etc.) rather than waiting indefinitely.

Does a large down payment help?

Yes, at least 20% down signals you're financially stable and serious about the loan.

The Takeaway

Getting approved for auto financing has become more challenging in 2022. Tighter lending standards mean rejection rates have hit their highest level in years. With a cautious outlook from lenders, applicants need to be prepared to strengthen their case through steps like improving their credit score and down payment savings. While approvals are harder to obtain, being proactive boosts your odds of financing a new or used car purchase in today's climate.

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