The CR investigation found that the interest rates charged could be in the atmosphere. In some cases, annual percentage rates exceed 25 percent. But our analysis also reveals that consumers who are financially similar and have similar credit scores can be charged at widely different interest rates. Even people with high credit scores can pay exorbitant amounts.
What’s going on?
Experts say CR’s analysis points to a broad problem with the way auto loans are arranged in this country: Dealers and lenders may set interest rates based not only on risk — the standard practice of underwriting loans — but also on what they think they can get away with. Studies show that many borrowers do not know that they should, or even can, negotiate loan terms, or shop for other offers.
Discrimination can be a part of it, too. Other research indicates that people of color are more likely to get high-interest car loans, even when they have similar or even better credit than whites. But unlike the federal data provided on mortgages, the data analyzed at the commercial registry level included no information on the borrowers’ race, age, or gender.
The auto lending industry also operates in a regulatory quagmire. Many states have confusing and contradictory laws regarding how high rates are set, 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 default on expensive auto loans can face serious repercussions.
It makes it difficult to build the savings needed to buy a car outright, says Pamela Fohey, a professor at Cardoso College of Law in New York City who has published several studies on car lending. Long-term auto loans — the average is now about six years — exacerbate the problem, she says, as people trap people in debt to finance a necessity like transportation.
“The consumer trap is, of course, a boon to lenders,” Fohey says.
Defaulting on auto payments can lead to repossession, which leads to a series of other problems.
Their cars, Lana Ashe of Oklahoma and Dennis Lamar of Connecticut, were recovered last year in the middle of the pandemic, after they got stuck in high APR auto loans that proved more expensive than they could afford. Without a car, Lamar had to ride for appointments with doctors. Ash had to take out another loan to fix a broken transmission in an old car.
“To this day, I still feel annoyed and annoyed about it,” Asch says.
Many Americans have experienced similar results. By the spring of 2021, an estimated 1 in 12 people with a car loan or lease, or nearly 8 million Americans, were more than 90 days late on their car payments, according to a CR analysis of data from the Federal Reserve in New York and Philadelphia.
Furthermore, a large number of auto loans nowadays come with negative equity right from the start. Nearly half – 46 percent – of the loans in the data we reviewed were underwater. That is, people owe the car — $3,700 on average — more than the car was worth.
“It’s shocking that so many Americans are routinely overpaid for auto loans, compared to others in their credit score range,” says Chuck Bell, a fiscal policy advocate at CR. “In a competitive and efficient market, you wouldn’t expect to see this huge level of variance.”