Consumer reports spent a year on an auto loan investigation report. The magazine’s findings are hardly surprising to car enthusiasts – a frightening number of people are overcharged for auto loans. But while we devotees know it in our hearts, RC has the juicy and juicy data to back it up.
RC collected its information on nearly 858,000 loans from 17 lenders, as well as data on borrowers, including credit scores, income and employment status. These were obtained from mandatory filings submitted to the U.S. Securities and Exchange Commission in 2019 and 2020 detailing asset-backed securities, which are auto loans bundled into an asset that investors can purchase. Obviously, there are over 858,000 auto loans outstanding in the country, but RC could only review loans that required public disclosure.
To put the sample size into context, a February 2021 Experian report put total U.S. auto loan debt at $ 1.37 trillion and the average auto loan balance at $ 19,865. . Multiply RCThe 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 has reviewed “thousands of pages of regulatory records, court records, trade publications, industry reports, financial records, public records obtained through the Act. freedom of information and [interviewed] over 90 federal and state regulators, advocacy organizations, consumers, lawyers, legal experts, academics and industry groups. “
Longer loans being the norm, RC said the average monthly payment is almost $ 600, whereas 10 years ago it was around $ 450. About 8 million Americans are more than 90 days late on these payments. And a regrettable number of loans start off badly, with RC claiming that 46% of loans in the data he examined were underwater from the start, to the tune of $ 4,000 over mean.
Buyers with the same credit scores would be charged very 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 first and super first level credit scores, with the latter starting at 720 and above. This was also regardless of the buyer’s race and ethnicity, as this information is not included in any filing with the SEC.
RC said about 21,000 borrowers in his data set with credit scores above 720 were repaying loans with APRs of 10% or more. Two Californian buyers, each with a prime credit rating and each trying to buy a 2017 Chevrolet Trax, funded by GM Financial. One buyer got 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 accepted 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 problem has sometimes put dealers and lenders at odds with each other. For buyers of the dataset, lenders only verified income 4% of the time, which was more often than they verified employment. When banks don’t exercise due diligence when it comes to a buyer’s creditworthiness, such as checking income or employment, the dealership can end up with skyrocketing repossessions. In one case in South Carolina, the lending bank even attacked the concessionaire for bad debts; the dealer then in turn sued the bank.
One of the crucial points to remember here is the dire need for consumer education. While the lenders who would be the subject of a notice said RC buyers have options when it comes to financing, which is unquestionably true, a large number of buyers do not know (and therefore have not been made aware of) their options or simply do not have the time or resources to search for them correctly. Car buyers focus irrationally 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 people in the data set expect the dealer to do their best for the buyer.
How often do you think this has actually happened?
Look no further than the fact that by RC, at least 80% of auto financing is arranged through dealerships, who are legally allowed to increase a lender’s APR from 1% to 2%. Paul Metrey, senior vice president of the National Automobile Dealers Association, said RC “There is no financial incentive for dealers to present longer term or more expensive credit options to consumers.” But it seems absurd to us to think that GM Financial would not find a way to reward a GM dealer who would have opted for a loan of 2% more. It’s hard to refuse free money.
Head to RC to discover the whole story. It’s a long time, but it should be required reading for everyone who gets a loan from any lender to purchase any type of vehicle.
Warhol said, “Art is what you can get by with.” Auto financing too.