Auto Loan Trends Amid Tightening Credit Conditions

Consumers are increasingly pessimistic about getting approved for auto loans. Roughly one-third of auto loan applicants now expect to be denied, the highest share on record according to the SCE Credit Access Survey. This sentiment reflects a real rise in rejections: the auto loan rejection rate hit 11.4% in 2024, a new peak since tracking began in 2013 as reported by the Federal Reserve Bank of New York. By contrast, pre-pandemic auto loan rejections were markedly lower (e.g. in 2019). The jump in denials comes as lenders tighten standards – in mid-2023, a net 27.5% of banks reported tightening auto loan criteria according to FRED data – due to concerns over economic uncertainty and borrower risk. In fact, the share of "discouraged" consumers who needed credit but didn't apply (expecting rejection) climbed to 8.5%, also a series high. These trends underscore a significantly tighter credit environment for auto financing compared to the easy credit days of 2021-2022.

During the pandemic, ultra-low interest rates, stimulus cash, and accommodative lending led to easier approvals and record-low delinquencies. As the cycle turned, lenders became warier. Federal Reserve surveys confirm that banks' lending standards for consumer loans, including autos, moved to the "tighter end" of their historical range by 2023 according to The Senior Loan Officer Opinion Survey on Bank Lending Practices by the Fed. Many banks explicitly indicated reduced risk tolerance and expected to tighten standards further. In short, what had been a borrower-friendly market has swung toward caution. Higher required credit scores, larger down payments, and lower loan-to-value allowances are increasingly common as lenders seek to curtail future losses.

Loan Approval Rates vs. Credit Performance Over Time

Auto loan approval rates have slid as credit conditions tightened. In 2024 the approval rate was roughly 88.6% (inverse of the 11.4% rejection), down from ~95% approval just a few years prior. Meanwhile, credit default indicators have reversed course from pandemic-era lows. Auto loan delinquencies and defaults, which fell to historic lows in 2020-2021, have now surged above pre-pandemic levels according to the Fed. By late 2023, delinquency rates on auto loans were higher than in 2019, erasing the temporary improvement seen during COVID relief programs. Notably, the deterioration is most pronounced among newer loans: borrowers who took out auto loans in the past two years are driving much of the increase in defaults according to data from the Fed. This suggests a combination of stretched affordability (larger loan balances) and, as the Federal Reserve analysts note, some relaxation of credit standards in 2021-2022 that is now coming home to roost.

Several structural shifts in auto lending may be contributing to higher delinquencies. For one, loan terms have extended significantly. As vehicle prices soared, lenders and dealers increasingly stretched loan maturities beyond 6 years. By Q3 2023, about 12% of auto loans carried terms of 84 months or longer, up from just 4.8% in 2019 according to a November 2023 report. While longer terms reduce monthly payments, they can lead to borrowers being "underwater" on their car (owing more than it's worth) for a longer period and have been associated with higher delinquency rates even for similar credit scores. In essence, some borrowers who might have qualified only for a cheaper car or shorter loan in the past were able to take on bigger, longer loans – boosting sales and balances, but at the cost of greater default risk down the line.

Another factor is the interest rate shock. The average interest rate on financed vehicle purchases jumped to about 8% by the end of 2023, roughly double the rate just two years prior. For subprime buyers, rates often exceed 14%. These higher rates, combined with inflated car prices, have pushed monthly payments to record highs (the average new car payment reached ~$730 in 2024 according to NerdWallet). The strain is evident: more borrowers are falling behind on payments, especially in lower-income and subprime segments. Delinquency rates have been rising across all credit score bands – even prime borrowers are inching upward – but the surge is steepest for subprime loans. There is a clear inflection: after an era of easy money and low defaults, auto credit quality is deteriorating as the tide goes out on loose credit.

Lender Profitability and Portfolio Performance by Institution Type

Despite these headwinds, auto lending remains a key profit center, and its performance varies by lender type. Banks and credit unions – which account for roughly half of auto loan originations according to Consumer & Community data – generally focus on prime borrowers and thus have comparatively lower delinquency rates than specialty auto finance companies. For example, large banks and credit unions both had auto loan delinquency rates near 0.8–0.9% in late 2023, whereas non-bank subprime auto lenders saw substantially higher levels as reported by Liberty Street Economics. In fact, an analysis by the New York Fed showed that the best-performing auto loan portfolios belong to small banks and credit unions, which had the lowest delinquency rates among all lender categories. These institutions often know their customers well and impose prudent underwriting (the median credit score on new credit union/bank auto loans in 2024 was just over 730, versus 636 for loans from finance companies). The result is fewer charge-offs relative to peers.

Auto loan net charge-off rates at U.S. banks have spiked to their highest levels in over a decade (above long-run average), after plunging to historic lows in 2021 amid pandemic stimulus.

From a profitability standpoint, net interest margins (NIMs) on auto loans have been a mixed story. Rising interest rates allowed lenders to charge more for auto loans – boosting interest income – but also raised funding costs. As of Q3 2023, banks' overall NIM had dipped to about 2.89%, slightly below credit unions' 3.09% margin according to CreditUnions.com. Credit unions historically offer slightly lower loan rates, but they also benefit from low-cost member deposits, keeping margins comparable to (or above) banks. In fact, credit union NIM has hovered around 3.0% recently when Credit Union Results Tanked in Q4, even as their cost of funds inched up. Fintech and non-bank auto lenders don't report NIM the same way (since many securitize loans or earn fees), but they typically charge higher APRs to compensate for risk and funding costs. Those higher yields can make auto loans lucrative if losses are contained – a big "if" in the current climate.

Charge-off rates are now eating into those margins. U.S. banks' auto loan net charge-off rate jumped to about 1.2% in early 2024, up sharply from ~0.5–0.8% pre-pandemic according to YCharts. This is nearly double the long-term average loss rate of 0.65%, reflecting the surge in delinquencies. For credit unions, which tend to have more conservative auto loan books, charge-offs hit 0.77% (annualized) in Q4 2023 – a decade high for the industry, up from just 0.43% a year prior. In other words, both banks and credit unions are now writing off auto loans at the fastest pace since at least the early 2010s. This uptick in losses has begun to drag on lender earnings. Credit unions' return on assets has fallen to 0.59%, in part due to "skyrocketed" loan loss provisions for deteriorating performance as Auto Loans Drag on in 2024. Banks, too, have boosted reserves as more borrowers default, though overall bank profitability has been cushioned by other loan categories and fee income.

It's worth noting that fintech and subprime-focused lenders are seeing the worst performance. The New York Fed reports that auto loans originated by "non-captive" finance companies (often serving subprime borrowers) have seen the most pronounced rise in delinquencies, now far above pre-pandemic levels . These lenders charge high rates (often well into double digits) to offset risk, but many are still struggling as loss rates spike. Some have pulled back or tightened approval criteria significantly. By contrast, captive auto lenders (affiliated with manufacturers) and prime-focused banks/credit unions are weathering the storm better, with delinquency rates much lower than those of subprime finance companies as noted in Breaking Down Auto Loan Performance from Liberty Street Economics. Still, even prime portfolios aren't immune – their delinquencies have drifted up off the floor – so all lender types are laser-focused on credit quality now.

Mitigating Risk with Advanced Income & Employment Verification

In this challenging environment, lenders are turning to technology and data to improve underwriting without unduly stifling lending. One promising strategy is deploying advanced income and employment verification solutions (e.g. Verify4). These tools allow auto lenders to instantly validate a borrower's stated income and job status using reliable, up-to-date data – often pulling from employer payroll records or government databases in real time. By leveraging consumer-permissioned data and APIs, solutions like Verify4 eliminate the need for manual document checks (pay stubs, calls to HR, etc.) and reduce reliance on borrower self-reporting. The result is a more accurate assessment of the applicant's ability to pay, catching inflated income claims or fake employment before a loan is approved. In an era of higher defaults, this kind of verification can significantly mitigate fraud and default risk at origination. Lenders can avoid extending credit based on misrepresented finances, which in turn keeps portfolio losses down.

Moreover, robust verification can speed up decisioning for qualified borrowers. Rather than dragging out the underwriting process or adding more conservative buffers for fear of the unknown, lenders who use automated verification get reliable data within seconds. This means underwriters and risk models can make data-driven decisions with confidence. For example, if a borrower's income is instantly confirmed at a higher level than their credit report alone might suggest, a lender could approve a loan that they might otherwise have denied – expanding credit access safely. Verify4 touts coverage of "99% of employees" through its platform, indicating that most applicants' incomes can be verified in this manner. By streamlining verifications and improving their accuracy, such tools not only reduce default rates but also free up lenders to lend assertively where it makes sense. This is especially valuable for risk management teams trying to balance growth and credit quality.

In sum, tighter credit conditions have made prudent underwriting paramount. Lenders are seeing more applicants expecting denial and more loans going bad, a combination that pressures them to be both cautious and smart. Data-driven solutions like advanced income/employment verification provide a way to thread that needle – helping lenders pick the right borrowers and set appropriate terms. Finance professionals in underwriting and risk strategy are increasingly embracing these technologies to reinforce their loan portfolios. By weeding out unqualified applicants and verifying the strength of approved borrowers, lenders can improve loan performance even amid economic stress. In today's auto loan market, better upfront verification and risk modeling have moved from nice-to-have to necessity, enabling institutions to protect their net interest margins and loan books while still saying "yes" to worthy customers.