Auto Loan Rejections on the Rise

U.S. consumers might have their pick of employment in today’s robust job market, but that doesn’t mean everyone is getting financed for a car.  A Federal Reserve Bank of New York survey of consumer credit showed a spike in the rate of auto-loan rejections, to 8.1% in October from 4.5% in the same month last year.

For the full year, the average rate of car-loan rejections was 7.1%, up from 6.1% for 2018, even though applicants reported fewer denials in other parts of the record $14 trillion consumer debt market for the same 12-month period.

“The reported rejection rates for credit cards, mortgages and mortgage refinancing applications all declined compared to 2018,” according to the Fed’s snapshot of its annual survey.

November saw a surprise dip in the U.S. unemployment rate, to 3.5% from 3.6%, matching a 50-year low and fueling optimism that a strong American consumer can help keep the economy chugging along beyond its record 11th year of expansion.

Still, a decade of easy auto credit has fueled concerns that U.S. households could be on the verge of yet another financing bubble, only a few years after many borrowers emerged from the worst foreclosure crisis since the Great Depression.

But while consumer debt grew 4.8% in October versus a year earlier, analysts at Bank of America Global Research see a more stable picture forming next year.  “We believe consumer debt will continue to grow but the pace will continue to moderate, with expectations for slower growth in consumer spending and relatively stable lending standards,” wrote a team of analysts, led by Chris Flanagan.

That comes in contrast to the U.S. housing market, where Moody’s recently said it expects competition among lenders to result in slipping standards for home buyers with spotty credit.

In the run-up to the 2008 financial crisis, toxic subprime mortgages were bundled by banks into mortgage-bond deals and sold to investors without government backing.  However the Bank of America Global Research chart above shows that the U.S. government and banks are the biggest holders of consumer debt in this credit cycle.

Source:  MarketWatch/BofA Global Research