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Under the Hood: Car Loans Scrutinized as Discriminatory

When it comes to cars, whether it is a buyer’s or seller’s market, research shows African Americans often come out cheated in the rinse. Car dealers often work with third-party lenders, such as banks or credit unions, to provide financing options to consumers. Once that “indirect” lender offers the car dealer an interest rate on an auto loan, the dealer is allowed to markup that rate to the buyer for additional compensation.

The auto industry, according to a 2013 report continues to bait minority borrowers and offer them the costliest car loans, a development that threatens to exacerbate the economic distress in some Black and Hispanic neighborhoods. The practice, called reverse-redlining, further abuses the most vulnerable Americans through predatory lending.

On loans made through the dealership, the dealer can markup the interest rate above the consumer’s creditworthiness. This interest rate markup, also known as “dealer reserve” or “dealer participation,” is described by dealers as the way they are compensated for time spent putting a financing deal together. However, since consumers usually do not know what they can actually qualify for, the markup is often a hidden cost to the consumer.

The report found that in more than 60 percent of the cases, the nonwhite individuals who were more qualified than their white counterparts were given more costly options. As a result, people of color who faced discrimination paid an average of $2,662 more over the length of their loans.

In one instance, Ally Bank charged more than 235,000 minority borrowers higher interest rates for auto loans between 2011 and 2013. The bank was subsequently ordered to pay $80 million in damages to harmed African American, Latin, and Asian and Pacific Islander borrowers and $18 million in penalties.

Legislation introduced in 2013 was later rescinded under the Trump administration, returning car buyers to either an unleveled playing field or one with hidden and costly pitfalls.

Delvin Davis of the Center for Responsible Lending, a nonprofit research and advocacy group for consumers, conducted the auto lending research. The author of “Non-Negotiable: Negotiation Doesn’t Help African Americans and Latinos on Dealer-Financed Car Loans” said Black and Latino purchasers often get hoodwinked into costly additions and overcharged.

“People of color are more likely to have the dealer indicate they are getting the ‘best rate available,’ and be told that add-ons are mandatory purchases. In addition, people of color are more likely to be unaware of dealer interest rate markups,” Davis said. “These three factors are also associated with higher delinquency rates, and therefore a greater chance of losing the car through repossession.”

Like the old adage of an educated consumer being the best customer, Davis advises Black and Latino consumers to use their banks or credit unions to obtain pre-approved auto loans before visiting a car showroom. He also suggests avoiding unnecessary “add-ons” including extended warranties, which may be cheaper when purchased from a third party.

“Once you have that approval, you’re basically taking that check to the dealership and it can become a good negotiation chip that you can use,” Davis said. “It’s incumbent on the consumer to make sure you realize everything that’s in your contract and don’t be afraid to ask questions.”

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