Nearly 92% of American households rely on a personal vehicle to manage their daily lives. Consumers shopping for a vehicle in May learned that the average cost of a new car was $49,307, and that used cars averaged $25,918, according to Cox Automotive.
But the high price of vehicles is not the only financial challenge confronting Black and other consumers of color. Discriminatory and predatory practices in the sale and financing of cars have pushed millions of buyers into longer and higher-priced loans.
A study by the National Fair Housing Alliance found that non-white test shoppers were given more expensive financing 62.5% of the time compared with white testers with equivalent or worse credit. Similarly, another recent independent study by the Century Foundation concluded that Black, Hispanic and American Indian borrowers are given higher interest rates on auto loans across all credit tiers. Research published by the Federal Reserve found Black borrowers disproportionately pay the highest interest rate markup, resulting in more than $3,000 in additional interest over the life of the loan.
Now a new report released by the Center for Responsible Lending (CRL) found that the terms of predatory loans, as well as dealers and lenders conniving to drive up costs — not the consumers’ willingness to pay — made delinquency and default more likely. These tactics limit alternatives borrowers can pursue to lower their payments. This conclusion came through a series of consumer focus groups with subprime credit scores, most of whom are Black, reeling from the effects of predatory car loans.
High-pressure tactics, misleading claims about vehicle features or conditions, and aggressive upselling of overpriced add-ons and services together obscured the true cost of the vehicle and prevented consumers from making informed decisions. Beyond the auto sale, dealer financing exposes consumers to interest rate markups, hidden fees and unaffordable loan terms.
Nicole, a Black woman in her early 50s who lives in Minneapolis, shared her personal story of urgently needing a vehicle as she went through a separation in which her former spouse kept their car.
A full-time employee at a nonprofit organization focused on ending homelessness, she earns less than $50,000 a year. She took out a loan for $19,000 with an interest rate of 24% and a 48-month term. In addition to the inflated sales price of the vehicle, the dealer included a $2,000 warranty, and the lender rolled over a previous loan for a repossessed vehicle that significantly increased the total financing for Nicole.
Shortly after the sale, Nicole discovered the car lacked heat and had a failed engine, fuel pump and water pump — all undisclosed problems requiring costly repairs that were not fully covered by the warranty. She now owes more on her car than it’s worth but still needs a way to get to work. Making payments has been a struggle, and on a few occasions the car has been taken away due to late payments.
“You pay that, and nothing, nothing ever changes,” Nicole shared. “And even when it reports on the credit bureau, it says that I’m still past due, like, 31 payments, and they’ve come, they’ve taken the truck. I pay when I’m past due, and they give it back to me. So, it’s a vicious cycle.”
A portion of CRL’s report explains the costly and limited options lenders provide borrowers who fall behind on payments:
“A deferment lets a borrower skip a payment, but the skipped amount is added to the end of the loan along with additional interest. Lenders often describe deferments as just moving a payment to the end and does not disclose the true costs of doing so. However, the accumulating interest means borrowers end up paying more than the deferred payment and may become even more underwater as the car depreciates while the loan balance grows.”
“Isabelle,” a journalist in Florida using a pseudonym, related her experience with deferment:
“The problem with that is like they charge a daily interest, and you never catch up. Because I did that a couple of times, I was paying my car and then the payoff amount would not change at all, because the interest is so high, plus all those daily fees and everything. So, I didn’t have a choice. I had to do it. I do not recommend [it] if you can stretch and maybe borrow some money from family, friends, or whatever, because it’s better than to do that.”
Many auto lenders have also turned to technology that remotely disables vehicles if a borrower falls behind on payments. These “kill switches” can put drivers at physical as well as financial risk.
Monica, another borrower, told of the lender disabling her car while she was driving:
“I forgot that they have the GPS thing installed. My car is jerking and I’m on the side of the road. And so when I called roadside, they were like, we can’t help you. It’s this [start interrupter device]. I’m like, you couldn’t send me an email? Like, you see my payment history. What if I was on the freeway, and not only just a regular street?”
CRL urges the Federal Trade Commission, the Consumer Financial Protection Bureau and states to establish several consumer protections, including limits on how much lenders can charge.
“This report shows how the advantages auto dealers and lenders have over consumers result in exploitation,” said Lucia Constantine, report co-author and a senior researcher at CRL. “Our government must establish guardrails to protect consumers — like it did in the mortgage market.”
Charlene Crowell is a senior fellow with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.
