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Auto Loans: The Problem

The auto lending market lacks transparency, and has escaped regulatory attention until recently. Consumers face several different negotiations when purchasing a ca: the price to pay for the car, the value of a trade-in, the financing and whether to purchase add-on products like extended warranties and other insurance products. The lack of transparency and misaligned incentives have created systemic abuses in the auto finance market.Some known abuses include:

  • Car dealer interest rate markup: When a consumer finances a car purchase through an auto dealer, the dealer has the discretion to increase the interest rate offered by the bank or lending institution and keep some or all of the difference as compensation. This practice cost consumers who in 2009 financed their cars through the dealer $25.8 billion in hidden interest over the lives of their car loans.
  • Yo-Yo sales: Yo-yo scams occur where the financing is not finalized before the consumer has taken the new vehicle home from the dealership – this is also known as conditional delivery or spot delivery. This turns into a yo-yo scam when the dealer tells the consumer that the financing “fell through” and tells the consumer to come back to the lot to sign a new loan with a higher interest rate or with other less favorable terms. Often, the dealer promised an interest rate the dealer could not deliver, but banks on the consumer falling in love with the car.
  • Add-on products: The practice by which dealers add various types of aftermarket, "add-on" products, like extended warranties and other insurance products, that in many cases lack value and are overpriced. CRL research also indicates that borrowers of color are more likely to be sold add-on products, and are more likely to be told the add-on products are required by the lender even when that is not the case.
  • "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.

Research & Policy