Americans are having a harder time getting approved for auto loans, as banks worry over the risk of defaults at a time when high interest rates and elevated car prices are squeezing budgets.
With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards. That’s freezing out buyers with lower credit scores who can’t afford a large down payment, while Americans with healthy finances are having more trouble than usual securing loans.
Access to auto credit is the lowest since August 2020, with the approval rate for loans down 1.6 percentage points year-over-year, according to Cox Automotive. At the same time, the percentage of US auto loans 90 days or more delinquent rose above pre-pandemic levels to 2.66% in the fourth quarter of 2023, according to data from the New York Federal Reserve. That compares to 2.37% at the beginning of 2020 and a 15-year average of 2.16%.
As the Federal Reserve sizes up the US economy as part of its bid to determine the right time to cut interest rates, the auto loan sector has been a window into the stress consumers are facing in the post-pandemic economy. Rates hikes and higher car prices have made it more difficult for the average American to afford a car, a necessity in many areas of the country without reliable public transportation.
“What people are struggling with is the level of inflation causing them to have to juggle expenses and try to stay current on their loans,” said Jonathan Smoke, chief economist for Cox Automotive. “It’s produced some very alarming statistics that indicate risk has grown in an environment in which lenders have become more risk adverse.”
Consumer Stress
Java Anvar is experiencing the turbulence in auto lending firsthand at the car dealership where he works in Hollywood, Florida. Many of his potential customers have struggled to get approved for loans in recent months, which is dragging down sales. The situation is the worst he’s seen in his two decades in the industry.
“Just because you have a good credit score doesn't mean the car loan is guaranteed for you — you need proof of income and references and lots of other documents now,” said Anvar, who heads up marketing and sales at Car Buy Sell dealership.
A car buyer like Matt Stuemky would usually have no problem getting a loan. The 44-year-old business owner in Oklahoma City has a credit score of almost 800, out of a possible 850, and a low amount of debt compared to his income. In normal times, he would be approved right away.
Instead, when he recently tried to get financing for a Ram 1500 truck that cost about $56,000, he got a rejection notice in the mail. Although he eventually got a loan through a different lender, the experience was much more time-consuming and stressful than he anticipated.
“It just caught me off guard, I've never had a loan denied,” he said. “The industry is definitely tightening up.”
Despite the difficulties some consumers are facing, one saving grace is that the job market is still strong overall, despite some layoffs by high-profile companies. Economists have recently lowered their forecasts for a recession, predicting strong consumer spending can buoy growth this year.
In addition, delinquencies are expected to fall in March and April because many people will get tax refunds that they can put toward their car loans, according to Jonathan Smoke at Cox Automotive. The average refund this year so far is $1,741, down about 13% from last year, according to the Internal Revenue Service, but Americans have until April 15 to file their taxes.
Still, tighter lending standards are hurting those who need the loans the most and can’t afford to wait, according to Yossi Levi, founder of Car Dealership Guy, a popular social media account on X for auto industry insights. Consumers who can make larger down payments or buy with all cash are still purchasing new cars without much trouble.
“It creates a big divide in the market and economy,” he said. “Ultimately it breeds a situation where consumers can't afford vehicles, so they hold onto their old cars longer. It hurts consumers, it hurts dealers.”
This article was provided by Bloomberg News.