Car loans are getting harder to get

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It got harder to qualify for a car loan in May, although it’s still historically easy.

The Dealertrack Credit Availability Index tracks auto loan application data to indicate whether access to auto credit is improving or deteriorating. It fell 0.8% in May, showing that loans got a little harder to come by during the month, but fell from an all-time high. Auto credit was easier to come by in April than at any time since the index started tracking in 2015.

The index is a product of Kelley Blue Book’s parent company, Cox Automotive.

The change is not a surprise. The Board of Governors of the US Federal Reserve (commonly referred to as “the Fed”) raised interest rates in May specifically to curb big-ticket purchases like homes and cars. Economists consider this to be the Fed’s most effective tool in trying to control inflation.

But the Fed’s decision could have a limited effect on the auto market. The main factor behind high car prices has been a limited supply of new cars due to the continued shortage of microchips, which is largely beyond the control of banks.

Lending standards for new auto loans tightened more than for used auto loans in May.

Since the onset of the COVID-19 pandemic in late 2019, the terms of the average new car loan have changed significantly. Approval rates have increased slightly, lead times have lengthened, and the average deposit has decreased. All of these factors have made credit more accessible. But negative equity has increased, meaning more borrowers owe more than their car is worth.

Americans seem to be tightening their belts as inflation spreads. According to the Conference Board, consumer confidence fell 2.0% in May. The number of Americans considering buying a new car has fallen, although it remains higher than a year ago.