Automobiles are the most common nonfinancial assets held by American families.
In most cases, owning and driving a vehicle is not merely a luxury, but a prerequisite to opportunity. Despite such high importance in our communities, buying and financing a vehicle remains a challenging task for consumers with several hidden abuses along the way.
- About 87% of families in the U.S. owned at least one vehicle as of 2007.
- In 2010, the auto industry reported $621 billion in new and used sales representing 48.3 million units.
- Over 79% of the auto loan volume is made through third-party indirect lenders that partner with dealerships.
- Consumers who financed their cars through a dealership pay over $25.8 billion in additional hidden interest over the lives of their loans.
- The average hidden interest rate added by dealers is 2.47 percent.
- A borrower with weaker credit may see a hidden rate increase of 2.84% to 5.04% when they finance their vehicle through the dealer.
- A rate markup increases the odds of default by 12.4% and repossession by 33% for subprime borrowers.
- According survey data, 79% of consumers are unaware that dealers can markup rates without their consent.
- African Americans and borrowers making less than $40,000 per year are more likely to purchase dealer add-on products.
- Consumers who experience a yo-yo scam receive on average an interest rate that is five percentage points higher.
What are the Problems?
Predatory practices in auto financing force consumers to struggle not only for a competitive and affordable car loan, but for a fair and honest one. Finding a good deal is often not based on the quality of the car or the creditworthiness of the consumer, but rather the consumer s ability to survive a financial shell game with one of the largest investments most people will ever make.
Some known abuses include:
- Auto loan markups: Also known as dealer reserves, auto loan markups involve kickbacks from third-party lenders to auto dealers for steering car buyers into loans with subjectively higher interest rates. This practice alone adds $25.8 billion in hidden interest over the lives of many car loans.
- Yo-Yo sales: Also known as spot deliveries or conditional sales, Yo-yo sales are deals where the financing is not finalized until after the consumer has already taken the new vehicle home from the dealership. The sale becomes abusive when the dealer calls the consumer back to the lot to sign a new loan with a higher interest rate or other abusive charges.
- Loan packing: The practice by which dealers add various types of aftermarket, "add-on" products that are usually unnecessary and overpriced in order to increase the price of the vehicle or the amount financed.
- "Buy Here, Pay Here" dealerships: These dealers typically finance used auto loans in-house to consumers with no or poor credit histories. The average APR is much higher than a bank or credit union loan. These dealers use their higher default and repossession rates to operate much like payday lenders; churning the same used vehicle several times as the basis for their abusive business model.
What are the Solutions?
- Ban the back-end compensation dealers receive for selling more costly loans with unfavorable terms to consumers.
- Prohibit yo-yo scams and ensure more meaningful enforcement to prevent them.
- Provide a consistent and transparent means of presenting the cost of the vehicle, all fees, and add-on product sales.
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