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More cars are finally available and prices are leveling off, but buyers now face borrowing challenges that could keep them from getting a new ride.
The Federal Reserve said the rejection rate for auto loans in June rose to 14.2% from 9.1% in February, the last time the survey was taken. That was the highest level since this data was first collected in 2013 and for the first time, exceeded the application rate.
Lenders are pulling back, leery of borrowers who have struggled with high inflation and a surge in interest rates the last couple of years, and have piled on debt to make ends meet. As consumers' credit balances grow, there’s a higher chance of default, especially in the market for auto financing, where the number of Americans paying at least $1,000 a month on new loans reached a record high of just over 17% in the three months ended June, according to Edmunds, the online car resource and information company.
With giant payments like that, it’s not surprising auto loan performance has been deteriorating. A severe delinquency rate in May was the worst since at least 2006 when data was first collected, while the default rate rose to nearly what it was in 2019, according to Cox Automotive, which provides tools for car buyers, sellers and owners. Severely delinquent loans are more than 60 days past due and defaults are more than 90 days past due.
"Consumers who are paying large amounts of finance charges could be in jeopardy of falling into a negative equity trap,” said Ivan Drury, Edmunds' director of insights. Negative equity is when the amount owed on a vehicle exceeds the value of the vehicle.
Will it get worse for consumers?
Many lenders, including Fifth Third Bancorp, Citizens Financial, U.S. Bank and Capital One Financial, have already either cut out or scaled back auto lending.
“Consumers are already under pressure, and they’re even worse off because banks are reducing their lending,” said Alex Liegl, chief executive at electric vehicle financing company Tenet. “If there are fewer options, interest rates are going to further increase for customers. Typically, sometimes, they won’t even qualify for financing, so they’re shut out from getting the car they want.”
The Fed said the average reported probability that an auto loan application will be rejected increased sharply to 30.7%, the highest level since the Fed started collecting this data in 2013.
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