CR’s investigation found that the interest rates charged can be stratospheric; in some cases, the APRs extend beyond 25 percent. But our analysis also reveals that consumers who are financially similar and have comparable credit scores may be charged widely differing interest rates. Even people with high credit scores can be billed exorbitantly.
What is happening?
Experts say CR’s analysis suggests a general problem with the way auto loans are organized in this country: dealerships and lenders can set interest rates based not only on risk (loan underwriting practice standard), but also what they think they can get away with. . Studies show that many borrowers are unaware that they have to, or even can, negotiate the terms of a loan or seek other offers.
Discrimination could also be part of it. Other research suggests that people of color are more likely to be offered high interest auto loans, even when they have similar or even better credit than white people. But unlike the federal mortgage data provided, the CR data analyzed did not include any information on the race, age, or gender of borrowers.
The auto loan industry is also operating in a regulatory quagmire. Many states have confusing and conflicting laws regarding how rates can be high, according to interviews with regulators in all 50 states and the District of Columbia. At the federal level, the Consumer Financial Protection Bureau has limited oversight of auto lenders.
Those who find themselves stuck with expensive auto loans can face serious repercussions.
On the one hand, it’s harder to save money to buy a car, says Pamela Foohey, a professor at the Cardozo School of Law in New York who has published several studies on auto loans. Longer-term auto loans – the average now is around six years – compound the problem, she says, by trapping people in debt to finance a necessity like transportation.
âThe trap for consumers, of course, is a boon for lenders,â says Foohey.
Delay in car payments can lead to repossession, triggering a cascade of other problems.
Lana Ash of Oklahoma and Dennis Lamar of Connecticut both had their vehicles repossessed last year amid the pandemic, after getting stuck with high APR auto loans that turned out to be more expensive than they were. could not afford it. Without a car, Lamar had to go to his doctor’s appointments. Ash had to take out another loan to fix a broken transmission on an old car.
âTo this day, I’m still emotional and upset about this,â Ash says.
Many Americans have faced similar results. In the spring of 2021, about 1 in 12 people with a car loan or lease, or nearly 8 million Americans, were more than 90 days late in paying for their car, according to a CR analysis of data from the Federal Reserve Banks of New York and Creme Philadelphia.
In addition, a significant number of auto loans today come with negative equity from the start. Almost half (46%) of the loans in the data we looked at were underwater; that is, people owed more on the car ($ 3,700 on average) than the value of the vehicle.
âIt is appalling that so many Americans are routinely overcharged for auto loans, compared to others in their credit score range,â said Chuck Bell, financial policy advocate at CR. âIn a competitive and efficient market, you wouldn’t expect to see this huge level of variation. “