While stabilizing car prices and increasing inventories might have you interested in buying a new car, you may be in for financing challenges because lenders have tightened their standards. According to June credit access data from the Federal Reserve, the auto loan rejection rate was 14.2% in June. Not only was this a significant jump from February’s 9.1% rate, but it was even higher than the 11.9% car loan application rate.
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Rising interest rates and high inflation have pressured lenders to be more cautious, as these factors contribute to larger monthly loan payments for car buyers. What adds to the risk is that many consumers already have high debt loads from ongoing economic challenges. As a result, lenders fear that taking on a hefty new car payment will make borrowers even more likely to default.
Recent data confirms the concern. Cox Automotive reported a severe delinquency rate of 1.68% for auto loans in general in May. Subprime auto loans had a higher severe delinquency rate of 6.48%. These rates were the highest since the company began collecting data in 2006.
As lenders tighten their standards, or even stop offering auto loans, potential borrowers could face even more challenges moving forward. “If there are fewer options, interest rates are going to further increase for customers. Typically, sometimes, they won’t even qualify for financing, so they’re shut out from getting the car they want,” Alex Liegl, CEO of the car financing company Tenet, told USA Today.
The good news is that you can take steps to increase your chances of getting a car loan, including choosing your lender wisely. For example, the Dealertrack Credit Availability Index indicated in June that captive lenders — manufacturer-owned finance companies — had particularly loosened their credit availability compared to credit unions, which had tightened it.
You can also try increasing your down payment, raising your credit score and paying down other debts. And if you’re shopping for an electric car eligible for a tax credit, you can look into specialized financing companies — such as Tenet — that will reduce your loan amount by the tax credit expected.
Just be cautious if you do get approved for an auto loan but have a high interest rate. Along with a larger monthly payment, you could end up with negative equity, where you owe more than your new car is worth.
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This article originally appeared on GOBankingRates.com: New Car Market: Here’s the Surprising Reason You May Not Be Able To Buy a Car Right Now