Unsurprisingly, people who got their loans through auto lenders and dealers buying here, pay here – independent dealers not affiliated with auto manufacturers who typically sell used cars – were also more likely to having trouble keeping up with their payments. . About a quarter to 40 percent of those borrowers would likely become delinquent within 60 days of the loan, the agency found. This compares to the 15 percent rates for people who got loans from banks and credit unions.
The CFPB also found that the higher default rate among people who got loans from buy-here, pay-her dealers was not because they were higher risk than other borrowers, but simply because they had to pay higher interest rates. After controlling for several variables, the agency estimated that an average borrower with a credit score of at least 560 had the same risk of default, regardless of whether they received a loan from a bank or a buyer’s dealer. -here, pay-here. And yet, according to the CFPB report, their estimated interest rate would be 13% with a buy-here, pay-here reseller loan, compared to 9% with a bank.
“It’s completely understandable that lenders want to charge higher rates to riskier clients, but this report shows that some subprime borrowers are charged a lot more than others,” says Chuck Bell, financial policy advocate at Consumer Reports. “And if you charge too high an interest rate, you are actually driving borrowers into default, which is a terrible result for them and for the economy as a whole.”
The agency stressed that because its analysis only finds correlations and does not establish causation, subprime borrowers wouldn’t necessarily save money if they went to a bank.
But the results complement a new Consumer Reports survey of auto loans, which found that consumers across the credit scoring spectrum can receive a wide range of annual percentage rates on loans. In some cases, borrowers with similar backgrounds have obtained very different rates from the same lender.
The CFPB offers some explanations that could explain the disparity in interest rates. For example, the data analyzed in the report did not include some variables that could skew the results, such as down payments by borrowers. Perhaps dealers and lenders are taking advantage of less savvy buyers who don’t know they could shop around and potentially get a better deal elsewhere.
In addition, the prices of auto loans are not standardized and consumers often do not know all the offers available to them. Consumers may try to get information about the offers that similar borrowers have received while shopping, says the CFPB, “but these options can be difficult and time consuming and only provide an incomplete picture of the best loan deals to which a specific consumer might claim. “
Experts recommend obtaining financing for a loan from a bank or credit union, if possible, before going to buy a car. And if you have to go through a dealership, remember that you can negotiate not only the full price of the car but also the financial terms of the loan offer.
The CFPB, in the study, wrote that its findings and limitations should prompt more researchers on the goals of auto loan borrowers, purchasing behavior, and how this influences loan outcomes.
But little data on auto loans is made public for study. CR’s recent investigation relied on granular data made public, by law, from lenders who pool and sell loans to investors in the form of bonds, one of the only sources readily available to independent researchers. to consider.
“As we recover from the COVID-19 pandemic,” Bell said, “state and federal policymakers should help subprime borrowers get secure loans at the best, most competitive interest rates available, so that they can make payments successfully and keep their vehicles. “