Car Loans Haven’t Been This Hard to Get Since August 2020 (2024)

FAQs

Why is it harder to get a car loan now? ›

Americans are having a harder time getting approved for auto loans, as banks worry over the risk of defaults at a time when high interest rates and elevated car prices are squeezing budgets. With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards.

In most cases with other dealerships, the financing process is what takes so long. The salesperson has to send the finance application off to a variety of banks to get you approved and then they only approve you on a certain car within a certain price range. There's really not much negotiation with that.

The Fed raised rates to counter inflation, which reached a 40-year high of 9.1% in June 2022. “I think the reason why credit is tighter today is how quickly rates turned around and surged,” said Sarah Foster, a Bankrate analyst. Higher interest rates prompted banks to restrict lending.

Having a high debt-to-income ratio — the amount of debt on credit cards, other loans or a mortgage compared with the amount you're paid — is another possible reason for loan denial. Also, a loan application could be declined for something simple like incorrect or missing information in your application.

At the same time, the percentage of US auto loans 90 days or more delinquent rose above pre-pandemic levels to 2.66% in the fourth quarter of 2023, according to data from the New York Federal Reserve. That compares to 2.37% at the beginning of 2020 and a 15-year average of 2.16%.

Your credit score is a major factor in whether you'll be approved for a car loan. Some lenders use specialized credit scores, such as a FICO Auto Score. In general, you'll need at least prime credit, meaning a credit score of 661 or up, to get a loan at a good interest rate.

If you have a low credit score, it can be difficult to get a loan approved. A bad credit score could be due to missed payments, too many defaults or even just not having enough credit history. Lenders want to see that you are responsible and can manage your finances wisely.

How to get a loan when everyone denies you? ›

Paying down debts, increasing your income, applying with a co-signer or co-borrower and looking for lenders that specialize in loans within your credit band could increase your approval odds.

Getting a personal loan with a co-signer that has a strong credit score and a solid income can boost your application. Your co-signer – ideally, a family member or close friend – will apply alongside you, and you'll both be responsible for repayment of the loan.

Poor credit score

Most lenders have a minimum credit score as part of their eligibility criteria. Many lenders want to see fair credit — a score of 620 or higher. If your credit score is lower than the lender's requirement, you will immediately be denied.

The Fed recently released a new batch of information that found that the overall rejection rate for loan applications was 21.8 percent. It's bad—but not quite as bad—for auto loans, which hit 14.2 percent in June, up from 9.1 percent in February.

Car Loan Underwriting Process

Some lenders will conduct an underwriting process in order to approve it for finance. The time frame it takes auto loan underwriters to review and approve a car loan depends on who you choose to apply with, the amount you need, and your creditworthiness.

Habitually poor credit history – If your credit reports show you continually pay your bills late, make partial payments, and/or show a number of unpaid bills in your past, you may get denied, especially if you have a poor credit score.

For most borrowers, buying a car is still an expensive proposition. Auto loan rates are expected to stop rising and possibly start descending in 2024, but they'll likely remain elevated in comparison to recent years (alongside the broader interest rates environment).

It may be easier to secure a loan for a new car than it is for a used car, and new car loans often come with lower interest rates. Used cars can be a good fit if you're on a budget and they generally cost less to insure; however, interest rates for used car loans are often higher than for new car loans.

Financial Advice

The Fed recently released a new batch of information that found that the overall rejection rate for loan applications was 21.8 percent. It's bad—but not quite as bad—for auto loans, which hit 14.2 percent in June, up from 9.1 percent in February.