Borrowers are getting rejected for loans at the highest rate in 5 years
A Federal Reserve survey found that the rejection rate for credit applicants increased to 21.8% at an annualized rate in June.
That's the highest mark since June 2018.
On average, the reported probability that a loan would be rejected increased for all loans, from autos to credit cards.
For anything from credit cards to auto loans, lending conditions are getting tougher and tougher for Americans.
A recent New York Federal Reserve survey found that the overall rejection rate for credit applications increased to 21.8% year-over-year in June. That's the highest level since June 2018, and the increase hit every age group but weighed most on those with credit scores below 680.
It's been over a year since the Fed first started raising interest rates to combat historic inflation, and after 10 consecutive hikes, policymakers opted for a "skip" in June but many analysts see more hikes still to come.
Higher borrowing costs are meant to discourage spending and, as a result, cool down the economy and tame inflation. But rate hikes also make the general business environment more difficult as well, which we saw manifest several months ago across a slew of bank failures starting with Silicon Valley Bank. Since then, credit availability has tightened significantly as banks shore up deposits and become less willing to lend.
The Fed's survey highlighted the pain that individuals are feeling. All types of loan applications have seen higher rejection probabilities. Auto loans, for example, saw a rejection probability of 30.7%, while mortgages and credit card limit increases stood at 46.1% and 42.4%, respectively.
Given the tighter lending conditions, many have stopped applying for loans altogether.
"The application rate for any kind of credit over the past twelve months declined to 40.3 percent from 40.9 percent in February, its lowest reading since October 2020," Fed researchers said. "Application rates declined to 11.9 percent for auto loans and 12.5 percent for credit card limit requests, but increased to 24.8 percent for credit cards, 6.5 percent for mortgages, and 5.3 percent for mortgage refinances."
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