Auto Loan Rejection Rate Hits New High As Lenders Clamp Down

[ice-capades]

Auto Loan Rejection Rate Hits New High as Lenders Clamp Down

https://fordauthority.com/2023/07/auto-loan-rejection-rate-hits-new-high-as-lenders-clamp-down/

 

 

Following years of low interest rates, the Federal Reserve began raising them months ago as a way to quell soaring inflation. On the downside, higher rates make borrowing money to buy things like cars and homes more expensive, though average transaction pricing has declined somewhat through the first half of the year. However, new auto loan rejection rates are also on the rise – hitting a new all-time high in June, in fact – meaning that it’s getting more difficult to secure financing, according to Automotive News.

 

According to a new Federal Reserve study, the sheer number of applicants that were denied a new auto loan over the past 12 months came in at 14.2 percent, which is not only a new record, but also a sharp increase from February, when the rejection rate was 9.1 percent. Experts blame this jump on rising interest rates, as one might imagine, but also point to the fact that lenders are clearly concerned about delinquencies, particularly as the majority of these rejections applied to customers with credit scores of less than 680.

 

Interestingly, this didn’t come as much of a surprise to many applicants, as one-third of them admitted that they weren’t shocked by their auto loan rejection – also a new all-time high. A total of 39 percent of lenders surveyed by the Fed said that they expect to tighten their lending standards by the end of the year, while 29 percent have already done so.

 

Meanwhile, the number of new credit applications reached its lowest level since October 2020, all while the probability of rejections grew across the board – with autos coming in at 30.7 percent – yet another new record, something that can be attributed to stricter underwriting standards and more stringent payment-to-income limits.

Edited July 24, 2023 by ice-capades
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[silvrsvt]

Given the fact that going from say 1-2% to 7% interest raises the payment on a 50K car roughly $100 bucks a month, its not much of a surprise. 

[Rick73]

On 7/24/2023 at 10:24 AM, ice-capades said:

Experts blame this jump on rising interest rates, as one might imagine, but also point to the fact that lenders are clearly concerned about delinquencies, particularly as the majority of these rejections applied to customers with credit scores of less than 680.

Lenders being concerned about delinquencies seems appropriate; and responsible practice when lending money they may not be able to recover. Besides, if interest rates increase monthly payments more than buyer can afford, they can always choose a lower-cost vehicle.  Controlling inflation must take priority, or soon no one will qualify.
 

 

 

 

[akirby]

Catering to low credit score buyers almost bankrupted Nissan.  I suspect others are still doing it.

[Rick73]

FED just raised rate an additional quarter point, so this seems to be going in wrong direction for higher-cost vehicles.  Don’t really know, maybe it adversely affects all sales equally.  It’s hard to say without more data.

 

Recent bank failures due to poor management decisions, when it came to risky loans, is likely still fresh on lenders’ minds. 

[rperez817]

5 hours ago, akirby said:

Catering to low credit score buyers almost bankrupted Nissan.

 

When did that happen? My neighbor works for NMAC and we're not aware of the company "catering to low credit score buyers" in a manner different from other captive finance companies.

[akirby]

12 minutes ago, rperez817 said:

 

When did that happen? My neighbor works for NMAC and we're not aware of the company "catering to low credit score buyers" in a manner different from other captive finance companies.

Amazing you can Google EV stuff but can’t find this.

 

https://www.carsdirect.com/deals-articles/nissan-doubles-down-on-subprime-lending

 

I could be wrong about the original comment - I thought it was Nissan but maybe it was Mitsubishi or someone else.  But the CEO admitted that aggressively going after subprime buyers resulted in lots of defaults and almost ruined them financially.  This was several years ago.

[rperez817]

9 minutes ago, akirby said:

Amazing you can Google EV stuff but can’t find this.

 

https://www.carsdirect.com/deals-articles/nissan-doubles-down-on-subprime-lending

 

I could be wrong about the original comment - I thought it was Nissan but maybe it was Mitsubishi or someone else.  But the CEO admitted that aggressively going after subprime buyers resulted in lots of defaults and almost ruined them financially.  This was several years ago.

 

Don't know what you're referring to about "Google EV stuff" but the link that you shared involves a program that streamlines the process of Nissan dealerships finding alternate lenders for customers that NMAC doesn't approve. Other captive finance companies have similar programs.

 

In any case, Nissan's brush with near-bankruptcy back in the late 1990s had nothing to do with "catering to low credit score buyers".

[akirby]

16 hours ago, rperez817 said:

 

Don't know what you're referring to about "Google EV stuff" but the link that you shared involves a program that streamlines the process of Nissan dealerships finding alternate lenders for customers that NMAC doesn't approve. Other captive finance companies have similar programs.

 

In any case, Nissan's brush with near-bankruptcy back in the late 1990s had nothing to do with "catering to low credit score buyers".

I do not remember if it was Nissan or someone else but an Asian mfr that aggressively targeted subprime buyers admitted that it was a financial disaster for them.

 

Referring buyers to private subprime lenders is one thing.  Nissan is partnering with shady companies and offering factory incentives to both buyers and dealers to not only use the subprime lenders but also to push 84 month loans resulting in unhappy buyers who are upside down and more repossessions which won’t help Nissan vehicle values.  Not a good long term strategy.

[grbeck]

21 minutes ago, akirby said:

I do not remember if it was Nissan or someone else but an Asian mfr that aggressively targeted subprime buyers admitted that it was a financial disaster for them.

 

Referring buyers to private subprime lenders is one thing.  Nissan is partnering with shady companies and offering factory incentives to both buyers and dealers to not only use the subprime lenders but also to push 84 month loans resulting in unhappy buyers who are upside down and more repossessions which won’t help Nissan vehicle values.  Not a good long term strategy.

 

I remember that Mitsubishi, in the early 2000s, allowed buyers of brand-new vehicles to delay payments for a year after the purchase date, and that sent the company into a tailspin in this market. 

Edited July 27, 2023 by grbeck

[rperez817]

Speaking of auto loan risk distribution, data for Q1 2023 from Experian Automotive indicates that the percentage of loans in the Prime and Super Prime categories was the highest in 5 years, while the percentage in Subprime and Deep Subprime categories was the lowest in 5 years.

 

[akirby]

That’s a natural byproduct of higher vehicle prices.  Subprime buyers generally only qualify for the cheapest vehicles.  Recent prices push more to used vehicles.

[rperez817]

19 minutes ago, akirby said:

Recent prices push more to used vehicles.

 

That's correct, Experian Automotive indicated the vast majority of car buyers in all credit tiers except Super Prime chose used vehicles, with the Q1 2023 percentages for consumers choosing used cars being higher than 2 years ago for all tiers.

 

 

 

[grbeck]

Sales of used vehicles have always outnumbered sales of new vehicles - even during the 1950s and 1960s, when supposedly "everybody" was buying brand-new cars, if one believes the stories being peddled about the "good old days."

 

Much like a trip to a classic car show would lead one to think that "everybody" was once driving around in red convertibles, Corvettes, British sports cars, Cadillacs, loaded Mustangs and muscle cars with the biggest engines. 

Edited July 27, 2023 by grbeck

[fuzzymoomoo]

2 hours ago, akirby said:

I do not remember if it was Nissan or someone else but an Asian mfr that aggressively targeted subprime buyers admitted that it was a financial disaster for them.

Sounds like a Nissan thing. I think it’s what finally started to unravel Carlos Ghosn’s grip on the company 

[jpd80]

On 7/28/2023 at 12:42 AM, akirby said:

That’s a natural byproduct of higher vehicle prices.  Subprime buyers generally only qualify for the cheapest vehicles.  Recent prices push more to used vehicles.

Probably before 2020 but I do recall articles calling out Stellantis for going after a lot of subprime customers buying Rams and Jeeps in particular. That probably changed because of new vehicle shortages in the past few years…

Edited August 1, 2023 by jpd80