In a concerning trend for American consumers, the rejection rate for credit applicants has hit a five-year high, reaching 21.8% in the 12 months through June, according to a recent survey by the FRBNY. This surge in loan application rejections has been attributed to the combined impact of high interest rates and growing cautiousness among lenders in the country.
The report reveals that the rejection rate has risen significantly since the last survey conducted in February, which reported a rate of 17.3%. This increase has been observed across various age groups, with individuals holding credit scores below 680 experiencing the highest rejection rates.
One of the most notable findings in the survey is the rejection rate for auto loans, which has reached 14.2%. This is the first time since 2013, when the data collection began, that the rejection rate for auto loans has surpassed the application rate. This trend has been attributed to the risk aversion mode adopted by banks, leading them to cut back or entirely exit the auto lending sector. The tightening lending practices by financial institutions are adding pressure to already financially burdened consumers. Furthermore, the report indicates that almost one-third of auto loan applicants anticipate their loan requests to be rejected, a record high.
The pessimism extends to other credit types as well, with expectations of refusals for new mortgages, mortgage refinancing, and credit card limit increases seeing steep increases. The cautious approach of banks can be linked to the aggressive rate-hiking cycle implemented by the Federal Reserve, making financial institutions wary of potential risks during a potential economic downturn.
As interest rates continue to rise, overall credit applications have declined to 40.3%, the lowest level since October 2020. However, despite the current climate, 26.4% of respondents still express their intention to apply for credit in the coming year. Looking ahead, the survey projects that the average probability of loan application rejection will continue to rise across all loan types. The numbers are particularly concerning, with probabilities reaching new highs: 46.1% for mortgages, 42.4% for credit limit increase requests, 32.8% for credit cards, 30.7% for auto loans, and 29.6% for mortgage refinance applications.
A separate report published earlier this month showed that beyond the loan rejections, borrowing has become more expensive overall. Interest rates on bank-issued credit cards have reached their highest level since data are recorded.
Data Source: Federal Reserve
While the Federal Reserve left rates unchanged at its last meeting in June, it is expected that the central bank will continue its rate hikes in the near future. The combination of rising interest rates and a cautious lending environment may continue to challenge American consumers in their pursuit of credit and financial stability.