Personal Finance Mar 30, 2024 03:30 AM EDT

Rising Debt Levels Lead to More Loan Rejections 

By April Fowell

In the last two years, half of Americans who asked for loans had their applications denied, citing a recent poll by personal finance website

Rising Debt Levels Lead to More Loan Rejections

In the last two years, half of Americans who asked for loans had their applications denied, citing a recent poll by personal finance website
(Photo : by Stephen Chernin/Getty Images)

This discovery coincides with banks' recent tightening of guidelines on consumer loans. Since 2022, interest rates have increased significantly as the Federal Reserve fights inflation.

The chances of being accepted for a loan nowadays are as good as tossing a coin, according to a recent Bankrate poll. Approximately 50% of candidates are rejected, often more than once. 2,483 persons participated in the YouGov poll that was conducted in January and February.

A new credit card or an increase in credit limit on an existing credit card were the most common denials mentioned by unsuccessful applicants. Some said they had been denied personal or auto loans.

In reaction to the Federal Reserve's relentless drive to raise interest rates, banks have started curtailing loans. The Federal Reserve raised its benchmark rate from practically zero to over five percent, a 22-year high, between March 2022 and July 2023.

In order to combat inflation, which in June 2022 hit a 40-year high of 9.1%, the Fed increased interest rates. The increase in interest rates forced banks to limit credit. Several banks reported they had tightened lending rules in a Fed poll conducted last summer. Relatively few banks claimed to have facilitated borrowing.

Read also: Record National Debt Raises Concerns, But Average Impact on Individuals May Be Nuance

Tightening Credit Requirements Pose Challenges for Borrowers

According to the most recent Fed poll conducted in January, certain banks will still be tightening their credit requirements in 2024. Potential borrowers with tighter credit are put in an especially unpleasant situation: getting a loan is more difficult and costs more.

Think about a typical 30-year mortgage. At the height of the epidemic, rates fell below three percent. A $500,000 mortgage would include monthly principal and interest payments of around $2,100 at 3% interest. With today's normal interest rate of 7%, the same monthly payment balloons to around $3,300.

At a time when many Americans are depending on loans to make ends meet, credit has tightened. According to a new poll by Bankrate, almost half of credit card users carry a load from month to month-a rise from 39% in 2021. The total credit card debt in the country is currently greater than $1 trillion.

In the November Bankrate credit card poll, those with balances reported that they had accumulated the debt by using their cards to pay for necessities like food.

It comes as no surprise that it is more difficult for borrowers with poorer credit to get fresh borrowing. Approximately 75% of borrowers with bad credit reported being denied a loan in the most recent Bankrate poll, compared to 55% of borrowers with fair credit and 29% of those with exceptional credit.

Borrowing Money in 2024

Channel projects that as the economy strengthens and the Fed considers rate cuts that would decrease the cost of borrowing, consumers should find it "a little bit easier" to borrow money in the upcoming year, at least compared to last year. But the economy has a big role.

After the spike in inflation and the ensuing campaign of interest rate rises, economists are now more optimistic about a "soft landing" for the economy rather than the feared catastrophe. 

Related Article: Retail Rebound or Bubble Burst? December Surge Hides Underlying Inflation Concerns

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