The latest Federal Reserve survey has revealed that Americans are increasingly getting rejected when they apply for credit, with the rejection rate for loan applicants spiking to 21.8% in the year ending June, the highest in five years. This surge illustrates the collective impact of elevated interest rates and lenders growing more cautious. In comparison, the previous survey published in February, prior to the collapse of Silicon Valley Bank and other US lenders, reported a rejection rate of 17.3%. The rise in rejections has been widespread across age groups and notably prevalent among applicants with credit scores below 680.
Overall credit applications have plummeted to their lowest level since October 2020, pointing towards a challenging lending environment. As the credit market tightens, prospective borrowers are becoming more discouraged, with fewer Americans opting to apply for new credit. The reasons behind this trend could be multifaceted, ranging from concerns about rejection, changes in personal financial situations, or uncertainty about the broader economic climate.
A notable finding from the survey is the drastic increase in rejection rates for auto loans, which, for the first time since the survey began in 2013, exceeded the application rate, climbing to 14.2% from 9.1%. This indicates that the auto loan market, typically a more accessible sector for borrowers, is also witnessing a tightening in lending standards. Additionally, almost one-third of auto loan applicants expected that their application would be rejected, marking a record high in such expectations.
The survey also highlighted a sharp increase in reported expectations that applications for new mortgages, mortgage refinancing, or increases in credit card limits would be turned down. This expectation mirrors the increasing lending standards and declining credit applications, suggesting an increasingly challenging credit environment for borrowers in the US. It remains to be seen whether this trend will persist, as it will largely depend on the future direction of interest rates and economic conditions.
