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Why are lenders rejecting so many applications for loans?

Caleigh Wells Feb 5, 2025
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Due to a rising income-to-debt ratio, there's more risk associated with lending. Spencer Platt/Getty Images

Why are lenders rejecting so many applications for loans?

Caleigh Wells Feb 5, 2025
Heard on:
Due to a rising income-to-debt ratio, there's more risk associated with lending. Spencer Platt/Getty Images
HTML EMBED:
COPY

Even though consumers are still spending, we’re seeing more signs of economic hardship: This week’s job openings report showed a sharp decline in available jobs and last month the New York Federal Reserve said debt delinquencies are on the rise.

Well this week, a Bankrate report said that nearly half of loan applications got denied last year. Auto loan and mortgage refinance rejections actually hit record highs.

There are two big reasons that have led to more loan rejections, said Scott Baker, a professor of finance at Northwestern University. The first? Interest rates are still relatively high.

“It is kind of more dangerous, potentially, to grant additional credit, because … for the same level of income, a household will be able to support kind of less debt,” he said.

Because more of that spending power is used up on the higher interest rate.

The other problem: “We see that debt to income and debt payment to income ratios have gotten pretty high as well,” Baker said.

So banks see a higher risk that consumers won’t be able to pay loans back.

The Fed expects to cut interest rates twice this year, and the risk of recession is still relatively low. And yet Bankrate analyst Sarah Foster doesn’t expect the rejection rate to get much better.

“Even though the economy does look strong on paper, we also know that what goes into an American’s financial health is more than just job growth,” she said.

Americans are still reeling from years of high inflation.

“We know that Americans look at the cumulative impact of inflation — price levels, not the price rate of change — and since the pandemic, prices have increased about 21%,” Foster said.

Foster said consumers dipped into savings and retirement funds to afford higher living expenses. So the resulting need for more credit could take years to subside.

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