consumer reports spent a year on an auto loan investigation report. The magazine’s findings come as little surprise to car enthusiasts – a frightening number of people are being overcharged for auto loans. But while we enthusiasts know it in our hearts, CR has the juicy, juicy data to back it up.
CR collected its information on nearly 858,000 loans from 17 lenders, along with borrower data including credit scores, income and employment status. These were obtained from mandatory filings submitted to the United States Securities and Exchange Commission in 2019 and 2020 detailing asset-backed securities, which are car loans bundled into an asset in which investors can buy. Obviously, there are over 858,000 car loans outstanding in the country, but CR could only review loans that required public disclosure.
To put the sample size into context, a February 2021 Experian report puts total US auto loan debt at $1.37 trillion and the average auto loan balance at $19,865. multiply CRThe 858,000 borrowers of $20,000 give us $17.1 billion, or about 1.2% of the total outstanding debt. In addition to the raw data, CR said it reviewed “thousands of pages of regulatory filings, court filings, trade publications, industry reports, financial records, public documents obtained through the Freedom of information and [interviewed] more than 90 federal and state regulators, advocacy organizations, consumers, attorneys, legal experts, academics and industry groups.”
With longer loans being the norm, CR says the average monthly payment is almost $600, whereas 10 years ago it was around $450. About 8 million Americans are more than 90 days behind on those payments. And an unfortunate number of loans get off to a bad start, with CR saying that 46% of the loans in the data he looked at were underwater from the start, to the tune of $4,000 on medium.
Buyers with the same credit ratings would be charged vastly different interest rates, “with dealers and lenders setting interest rates based on what they think they can get away with.” This was true even for people with prime and prime credit scores, the latter starting at 720 and above. This was also regardless of the race and ethnicity of the buyer, as this information is not included in the documents filed with the SEC.
CR said about 21,000 borrowers in its data set with credit scores above 720 were repaying loans with APRs of 10% or more. Two California buyers, each with top notch credit scores and each trying to buy a 2017 Chevrolet Trax, financed by GM Financial. One buyer obtained a loan with an APR of 4.9%, the other a loan with an APR of 14.1%.
A 2018 Toyota Camry buyer in Maryland, whose “sterling credit” would normally earn an APR of 4.5%, instead took a six-year loan at 19%. If the buyer had paid off the loan, he would have spent $59,000 on the Camry by the end of 2025. Instead, the car was repossessed.
The issue has sometimes put dealers and lenders at odds with each other. For buyers in the data set, lenders verified income only 4% of the time, which was more often than they verified employment. When banks don’t do due diligence on a buyer’s creditworthiness, such as verifying income or employment, the dealership can end up with skyrocketing repossessions. In one case in South Carolina, the lending bank even sued the dealer for bad debts; the dealer then in turn sued the bank.
One of the crucial takeaways here is the dire need for consumer education. While the lenders who would sign up for the record would say CR buyers have options when it comes to financing, which is unquestionably true, a large number of buyers either don’t know (and therefore haven’t been informed) of their options or simply don’t have the time or resources to study them well. Car buyers irrationally focus on the purchase price of the car or the monthly payment, not how much they will pay over the life of the loan. For some reason, many respondents in the dataset expect the dealer to do their best for the buyer.
How often do you think this actually happened?
Look no further than the fact that, for CR, at least 80% of auto financing is arranged through dealers, who are legally allowed to mark up a lender’s APR by 1% to 2%. Paul Metrey, senior vice president of the National Automobile Dealers Association, said CR “There is no financial incentive for dealerships to offer consumers longer-term or more expensive credit options.” But it seems absurd to us to think that GM Financial would not find a way to reward a GM dealer who took out an additional 2% loan. It is difficult to refuse free money.
head on CR to find out the whole story. It’s long, but it should be required reading for anyone getting a loan from any lender to buy any type of vehicle.
Warhol said, “Art is what you can get away with.” Just like car financing.