Without a car, Lamar had to bum rides to doctors’ appointments. 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. “The trap for consumers, of course, is a boon to lenders,” Foohey says.įalling behind on car payments can lead to repossession, triggering a cascade of other problems. 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. Those who do get stuck with expensive car loans can face serious repercussions.įor 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. At the federal level, the Consumer Financial Protection Bureau has limited oversight of auto lenders. 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. The auto lending industry also operates in a regulatory morass. But unlike federal data provided on mortgages, the data CR analyzed did not include any information on the borrowers’ race, age, or sex. 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. 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.ĭiscrimination could be part of it, too. Even people with high credit scores can be charged exorbitantly.Įxperts 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. But our analysis also reveals that consumers who are financially similar and have comparable credit scores can be charged wildly divergent interest rates. That’s taking their money.”ĬR’s investigation found that interest rates charged can be stratospheric in some cases APRs stretch beyond 25 percent. “You’re not helping somebody to get a car if the odds are they’re going to lose it,” says Kathleen Engel, research professor at Suffolk University Law School in Boston who studies subprime financial products and is also the vice chair of CR’s board of directors. Because of recently skyrocketing prices for new and used cars, that debt is likely to grow even more. This is happening as total auto loan debt held by Americans has increased dramatically over the past 10 years, surpassing $1.4 trillion-more than the gross domestic product of Australia. Most borrowers pay their loan with no problem. But in recent years, tens of thousands of consumers have found themselves in financial sinkholes after receiving high-interest, longer-term auto loans that, like the Maryland resident, put them at serious risk of default, CR’s investigation found. Today, Americans with new-car loans make an average monthly payment approaching $600-up roughly 25 percent from a decade ago. The loan is among a database-of nearly 858,000 loans from 17 major auto lenders-that Consumer Reports compiled and analyzed as part of a yearlong investigation into the growing burden of car-related debt in the U.S. Within six months, records show, they were delinquent on their bill. The loan, issued by Santander Consumer USA, based in Texas, ate up more than 15 percent of the borrower’s estimated monthly income of around $5,400, which may have been too much for them to manage. When the borrower took out the loan, in November 2019, the average APR for consumers with a similar credit score was much lower, about 4.5 percent. By the time the loan is expected to be paid off, in late 2025, the borrower will have spent roughly $59,000-more than twice the car’s value and about what you would pay for a high-end Tesla Model 3. Two years ago, a Maryland resident with sterling credit financed a 2018 Toyota Camry with a 19 percent annual percentage rate loan and a monthly payment of about $823.
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