Rising Rejection Rates Cost Lenders and Borrowers

Rejection rates for credit applicants are at their highest since June 2018, according to the Federal Reserve, with automotive lenders turning away more applicants than other sectors. Automotive loan rejection rates grew from 9.1% in February to 14.2% in June. The five-point spike illustrates how quickly economic factors like rising interest rates, lender concerns regarding institutional liquidity and increases in consumer delinquencies along with inflated car prices can impact credit access and lenders’ return on assets (ROA).

Rejection Rates Hinder Progress and Profitability

Our U.S. Vehicle Accessibility Index 2023 found the two biggest barriers to purchasing a vehicle are unaffordability and an overly complex lending process. With the costs of owning a car continuing to fluctuate, borrowers are looking for a straightforward path to approval and reasonable loan terms. But that’s looking more unrealistic, with the average probability of rejection reaching 30.7%, the highest level since the Fed started collecting this data in 2013. And Cox Automotive found that May was actually the worst month to apply for a car loan in more than two years.

The increased automotive rejection rate disproportionately impacts those with lower credit scores or lack of credit history — individuals who lenders typically consider too risky. According to the Fed, rejection rates are highest among consumers with credit scores below 680. In automotive lending, the share of loans given to those with scores below 620 has reached historic lows.

Automotive loans are pivotal to building a credit history. A recent study of “new to credit consumers” published by TransUnion highlighted that auto loans were second only to credit cards as the most common line of credit opened and that over both the pre-pandemic and pandemic years, these consumers, particularly near-prime consumers, performed as well as more established, higher credit consumers, if not better.  CFPB’s analysis of consumer credit score migrations during the pre-pandemic and over the pandemic period showed that near-prime consumers demonstrated the most up mobility of credit tier with 43% moving to prime and super-prime credit tiers within twelve months later. The recent increase in rejection rates will have a lasting impact on borrowers who are still in the early stages of the credit-building life cycle, making it more challenging for them to qualify for financing for large purchases in the future.

But borrowers aren’t the only ones feeling the squeeze. Lenders are seeing their profitability targets get further out of reach as loan volumes recede and lending yields diminish with the dramatic retreat of credit approvals to more narrowly yielding prime loans.

A Promising Solution

While the news of increased rejection rates is unwelcome, the automotive lending market remains primed for growth. Cox Automotive found new and used vehicle sales were up compared to 2022. Plus, credit applications continue to grow. Demand isn’t the issue; it’s the risk — from liquidity concerns to defaults — causing lenders to tap the brakes.

But automotive lenders can offer more affordable loans to a wider set of borrowers while mitigating risk. Lending Enablement Solutions, like Lenders Protection™, use alternative data sources beyond FICO scores, institutional data and proof of income to identify creditworthy near-prime borrowers without increasing risk for automotive lenders.

Lending Enablement Solutions empower you to define your profitability potential regardless of economic uncertainty and shifting market trends. By setting custom yield targets and requirements for operating costs, you can continue to offer borrowers more competitive terms and affordable rates.

It may be tempting to look at other financial institutions as they increase lending standards and decrease near-prime loans and want to follow suit. But remember, losses happen when financial institutions don’t price loans appropriately for the risk they represent. Worse yet, is the risk of thwarting the upward development of today’s below prime applicant and the lost opportunities for yield with a credit worthy near-prime applicant rejected solely on the basis of a lower FICO score.  Only the use of more comprehensive, federated data on that borrower can help identify the emergence of the prime borrower of tomorrow. Solutions like Lenders Protection™ ensure you have access to comprehensive data, can price loans accurately and offer an invaluable competitive advantage, especially now. 

Lenders Protection™ is unique because it includes default protection insurance, which absorbs more than 85% of expected deficiency balances. Knowing you’re protected against default lets you act more competitively and close more loans.

Lending Enablement Solutions make it possible to reject rising rejection rates, deliver yield and serve more near-prime borrowers. Throughout our 20 years, we’ve helped hundreds of automotive lenders achieve profitability and increase vehicle accessibility to borrowers who would otherwise be overlooked. We’ve experienced the market dips and curves with our customers and understand the challenges facing automotive lenders today. Let us help you realize the opportunities and value of Open Lending and Lenders Protection™ today.