When Cheryl Magnusson and her husband sought to borrow funds for a home improvement initiative earlier this year, they were in for several surprises. Being seasoned loan applicants, including obtaining a mortgage in 2009 during the housing market collapse, the couple didn't foresee any substantial obstacles.
However, Magnusson, an educator based in Arizona who co-operates a consulting business with her spouse, began to encounter unanticipated difficulties. Initially considering a home equity loan, she found herself travelling down a different path as various brokers informed her of ceasing home equity loan offers. As a result, Magnusson consulted USAA, a veterans-based financial service provider, to secure a $75,000 personal loan instead.
According to Magnusson, USAA had previously approved her loan but this scenario was radically distinct. She recollected that the lender started asking for every document you could imagine. This involved presenting financial records, including tax returns dating back to 2020, despite Magnusson asserting that they possess sufficient income to clear the loan in under a year.
Magnusson’s impressive credit score exceeding 800 was no safeguard against this exhaustive procedure, exemplifying a fresh trend amongst American financial institutions. Recent studies indicate a significant tightening of lending standards by banks and other creditors, raising the bar for loan approval. With increased documentation dues, funding large purchases such as homes, cars, and renovations has consequently become an uphill struggle for the average American.
Recent data from the Federal Reserve Bank of New York’s consumer survey reveals an overall rejection rate for credit applicants nearing 22%, a record high since June 2018. Auto loans and mortgages experienced a surge in rejections by 14% and 13% respectively, while rejection of applications for credit card limit extensions skyrocketed by nearly 31%. Deutsche Bank alarmingly described these circumstances as “consistent with recession levels,” despite the absence of an ongoing recession.
Despite the hurdles, the Magnussons managed to secure their loan from USAA at a 10% interest rate to finance their kitchen refurbishment in July. Nevertheless, the couple was obligated to submit over 20 fiscal documents to secure approval from USAA. Magnusson was left “in tears” after spending multiple days tirelessly communicating with USAA to ensure the loan’s attainment.
Greg McBride, Chief Financial Analyst at Bankrate, attributed this strictness towards loans to the Federal Reserve’s rapid rate hiking campaign. According to McBride, the simultaneous tightening of lending standards is a consequence of recent failures of regional banks such as Silicon Valley Bank and Signature Bank. As a result, many banks are facing the threat of elevated capital requirements, thereby triggering stricter lending practices.
The increasing reluctance of some smaller lenders to approve loan requests is another trend. Navy retiree William Brown expressed similar frustrations when seeking a $7,000 increase on his credit card limit from his regional credit union. Despite his credible credit score exceeding 700, Brown was asked to provide excessive documentation, leading to a greatly protracted approval process.
Loan demand is also waning, with mortgage applications 26% lower than the previous year, while mortgage rates exceed 7%. McBride contemplated: “Do you want to pay more for something than you would have paid two years ago?” Magnusson and Brown's circumstances underscore the harsh realities faced by loan seekers in the current economic climate, where higher interest rates become the norm.
Despite the stark rise in loan application rejections and tighter standards, McBride assures that obtaining a loan is not entirely impossible for individuals with good credit. He advises potential borrowers to be financially prudent and consider whether borrowing money is the most practical solution to their predicaments.
