July 19th, 2023 7:00am PDT
As the economic struggles of Americans persist, securing a loan has become more difficult than ever. Recent data from a Federal Reserve survey conducted in February, June, and October highlights this issue, showing that the percentage of denied loan applications reached its highest rate in five years at 21.8%. This increase in rejections has affected all age groups but seems to have a particularly significant impact on individuals with credit scores below 680 (with credit scores ranging from 350 to 850).
Financial institutions are taking a cautious approach due to the Federal Reserve’s aggressive interest rate hikes and concerns about a possible recession. Major banks like JP Morgan Chase, Citigroup, Wells Fargo, and Bank of America are setting aside more money to cover the increasing number of consumer loans that have fallen behind. This is especially true for those related to rising credit card debts.
Bloomberg recently released a report stating that the four largest banks in the US experienced a considerable rise in bad consumer loans written off during the first quarter of 2023. The total write-off reached $3.4 billion, representing a significant 73% increase compared to the previous year.
Which typed of loans are experiencing the highest rates of rejection?
Data from the Federal Reserve reveals that the rate of rejections for auto loans has sharply increased, rising from 9.1% in February to a new high of 14.2%. This surpasses the application rate for the first time since data collection began in 2013.
The Federal Reserve also noted higher rejection rates for various loan types. Credit card applications had a rejection rate of 21.5%, while requests for credit limit increases faced a rejection rate of 30.7%. Mortgage applications and refinancing requests experienced rejection rates of 13.2% and 20.8%, respectively.
Will newly submitted loan applications continue to be rejected?
The Federal Reserve has observed a significant increase in the probability of loan application denials across all types of loans. Here are the specific figures:
- Auto loans experienced a significant increase of 30.7%, marking the highest level recorded since data collection began in 2013.
- Credit limit increase requests experienced a significant surge of 42.4%, reaching the highest level ever recorded in the dataset.
- Requests for credit limit increases saw a substantial increase of 42.4%, reaching the highest level ever recorded in the data series.
- The latest data reveals a significant increase in mortgage applications, with a surge of 46.1%, reaching the highest point in the data series.
- Mortgage refinancing faced a rejection rate of 29.6%.
How are consumers responding to these trends?
Over the past 12 months, there has been a decrease in overall credit applications as interest rates have gone up. In fact, it reached a low of 40.3%, the lowest since October 2020, down from 40.9% in February. However, despite this decline, the survey also showed that more respondents anticipate applying for one or more types of credit in the next twelve months. In fact, this proportion increased to 26.4%, up from 26.1% in February.