Auto lenders offer very different rates to similar borrowers

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A great job and a good credit rating should get you the best deal on a car loan. But if you’re not careful, you could still end up paying a lot more than you need to.

According to two new studies from Consumer Reports magazine and the Consumer Financial Protection Bureau (CFPB), what you pay to finance your car might not depend as much on your finances as you might hope. Both studies found that auto finance rates vary widely, even for those considered less risky customers.

While a number of factors are at play, the findings raise troubling questions about the fairness with which the auto loan industry treats its diverse customer base. Consumer Reports concluded that “dealers and lenders can set rates not only based on risk – standard loan underwriting practice – but also in part on what they think they can get away with.”

The magazine, which is also an advocacy group, calls on the CFPB to investigate this possibility and also urges consumers to sign a petition asking the agency to do so. While it can take a long time for auto lenders – and other institutions – to correct their flaws, in the meantime there are steps you can take to make sure you’re getting the best rate possible.

Similar customers, different prices. Which give?

Some of the disparities found in the studies in the rates are glaring, even for comparable borrowers buying the same or similar cars. Consumer Reports cites two loans of $ 18,000 by GM’s finance arm to California buyers equally well qualified to buy 2017 Chevrolet Traxes. One buyer received a rate of 4.1%, the other a whopping 14%. 1%.

The CFPB report focused on buyers with subprime credits and found that the APRs charged to these less qualified customers ranged from 10% to over 20%.

To some extent, according to the CFPB study, disparities in how clients and similar loan applications are handled can be attributed to the type of lenders visited, as well as to factors such as financial preparedness. a particular place to absorb losses due to defaults.

But Consumer Reports concluded that these “hard” factors are not enough to explain the differences in the market. Data on auto loan buyers is scarcer than for those who obtain mortgage loans, whose race, age and gender are tracked by the federal government.

But the magazine says research suggests race plays a role in terms of auto financing. A 2021 study co-published by Erik Mayer, assistant professor of finance at the Cox School of Business at Southern Methodist University, found that non-white borrowers pay more on average for auto loans than white consumers in the same situation.

What the results mean for auto loan buyers

Consumer Reports and the CFPB both say more research is needed to better identify the underlying reasons for the unpredictability of what consumers can pay for auto financing. Until that work is done, here’s how you can best protect yourself when shopping for a car loan.

Get pre-approved before you shop

While the dealership will invariably offer you financing, even for a used car, don’t make it the only place you shop for a loan. We recommend that you get pre-approved for a car loan up to a certain amount before you even start to market tires at dealerships. The dealer may possibly be able to offer a better finance deal, but having a loan secured up front gives you a good starting point for getting the best deal.

Even if you don’t have a pre-approval yet, consider telling the seller that you are considering getting one. And before you start shopping, research the current range of APRs and other loan terms available to borrowers like you, so that you can credibly say that you have looked at the rates and look forward to seeing the best deal on this. seller.

Negotiate the terms of the loan and be clear about where they are settling

As Consumer Reports notes, studies show that many borrowers are unaware that they can negotiate the terms of a loan or “that they should.” Also make sure you have clarified the terms and seen them in writing before signing the loan. Consumer Reports cites the case of a borrower who made it clear that they could only afford a payment of $ 350 per month, only to then receive a first monthly bill of $ 428. Sure, negotiations for a car and its financing can be a bit more difficult at this time, due to a shortage of vehicles to sell and high prices, but it’s always worth a try.

Show you’ve done your homework

You cannot of course change your race or other attributes that might unduly influence sellers. But using common sense about the auto loan process and current loan rates can help reduce any perception that you are an easy target for overcharging.

As you sit down to discuss loan terms, consider letting potential lenders know up front about the research you’ve already done. If you’re armed with a pre-approval from another lender, have it on hand and let the sales rep know, even if you haven’t revealed their rate yet.

All other things being equal, the more informed you appear as a customer, the less likely you are to be seen as a newbie and the more likely you are to get a fair rate on your loan.

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