Have you ever wondered why it’s so commonplace to finance car loans directly through the dealership that you buy your car through? We’ve been asking ourselves the same question. The auto loan industry is not exempt from the perils of discrimination, and we’re here to explore and address the negative impacts the industry has faced as a result.
Unfortunately, many dealerships discriminate against marginalized groups, including women, people of color, first-time buyers, students, or individuals with lower income. Despite this discrimination being illegal, it still happens; dealerships can make it very difficult for these groups to obtain auto loans or take advantage of their lack of knowledge by overcharging them.
80% of all car loans are indirect, meaning they’re obtained through dealers. The lender lets dealers charge a markup on top of the rate at which they’re willing to make the loan, and dealers can keep a percentage of that additional revenue. For example, marking up a loan by 2 percentage points today could add roughly $3,100 of additional interest, and the dealer would get $2,200 in revenue from the sale (Federal Reserve Bank of Chicago). For this reason, around 4 in every 5 car loans that are financed through a dealer are at interest rates higher than the bank rate.
One of the most common forms of discrimination is through the use of biased lending practices. Dealers may use factors such as race, gender, or income level to determine auto loan interest rates or the likelihood of approval. This means that individuals who are viewed as “risky” may face higher interest rates or be denied loans entirely, despite their financial capabilities.
According to the Consumer Finance Protection Bureau (CFPB), “Black and Hispanic applicants’ loan approval rates are 1.5 percentage points lower, even controlling for creditworthiness. In aggregate, discrimination crowds out 80,000 minority loans each year. Results are stronger where racial biases are more prevalent and banking competition is lower.”
Another form of discrimination is through disparate treatment. This happens when dealerships treat different customers differently based on their personal characteristics, rather than their creditworthiness. For example, a female customer may be offered a higher interest rate than a male customer with the same credit score and financial situation.
Furthermore, dealerships have also been known to engage in predatory lending practices. These are loan practices designed to exploit vulnerable borrowers who may not fully understand the terms and conditions of their loan. While this is particularly damaging for marginalized individuals who may have fewer resources to navigate complex financial products.
Lending discrimination is a pervasive and harmful issue that should not be ignored. Lawsuits and legislation to address immoral lending have unfortunately been largely unsuccessful. Just recently, the state of New York and the CFPB sued Credit Acceptance Corporation, which is partnered with over 12,000 dealerships, for “[steering] hardworking New Yorkers onto a path of financial ruin by tricking them into unaffordable, high-interest auto loans while cutting backroom deals with dealers to increase their own profits,” according to the attorney general. Users were averaging a 22% interest rate and accumulating suffocating levels of debt (CFPB).
With the consistent lack of transparency in the industry, financing through the dealership isn’t always the right answer. Just because you get a car through the dealership doesn’t mean your loan has to come from them!
Going directly to banks can eliminate many of the complex challenges and hours dedicated to the car-buying process. BankHunter is here to help if you’re looking for a faster, unbiased, free way to find the lowest interest rate and best bank option for your next car loan — all from the comfort of your home. Researching is time consuming and there are few good resources to educate yourself on everything that occurs behind the scenes. BankHunter was created so the uninitiated buyer doesn’t have to go to “car-buying school” in order to be empowered. We do that for you.