CR’s investigation found that interest rates charged can be stratospheric; in some cases APRs stretch beyond 25 percent. But our analysis also reveals that consumers who are financially similar and have comparable credit scores can be charged wildly divergent interest rates. Even people with high credit scores can be charged exorbitantly.
What’s going on?
Experts say that CR’s analysis suggests a broad problem with the way car loans are arranged in this country: Dealers and lenders may be setting interest rates based not only on risk—standard loan underwriting practice—but also on what they think they can get away with. Studies show that many borrowers don’t know they should, or even can, negotiate the terms of a loan, or shop around for other offers.
Discrimination could be part of it, too. Other research suggests that people of color are more likely to be offered high-interest car loans, even when they have similar or even better credit than whites. But unlike federal data provided on mortgages, the data CR analyzed did not include any information on the borrowers’ race, age, or sex.
The auto lending industry also operates in a regulatory morass. Many states have confusing and contradictory laws regarding how high rates can be 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 do get stuck with expensive car loans can face serious repercussions.
For one thing, it makes it harder to build the savings needed to purchase a car outright, says Pamela Foohey, a professor at the Cardozo School of Law in New York City who has published several studies on auto lending. Longer-term car loans—the average is now about six years—compound the problem, she says, trapping people in debt to fund a necessity like transportation.
“The trap for consumers, of course, is a boon to lenders,” Foohey says.
Falling behind on 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 in the middle of the pandemic, after getting stuck with high-APR car loans that proved to be more expensive than they could afford. Without a car, Lamar had to bum rides to doctors’ appointments. Ash had to take out another loan to fix a busted transmission on an old car.
“To this day, I still get emotional and upset about it,” Ash says.
Many Americans have faced similar outcomes. By spring 2021, an estimated 1 in 12 people with a car loan or lease, or almost 8 million Americans, were more than 90 days late on their car payments, according to a CR analysis of data from the Federal Reserve Banks of New York and Philadelphia.
Moreover, a significant number of auto loans nowadays come with negative equity from the outset. Almost half—46 percent—of the loans in the data we reviewed were underwater; that is, people owed more on the car—$3,700 on average—than what the vehicle was worth.
“It’s appalling that so many Americans are routinely overcharged for auto loans, relative to others in their credit score range,” says Chuck Bell, a financial policy advocate at CR. “In a competitive, efficient market, you would not expect to see this huge level of variation.”
