Many Americans Are Overpaying for Their Car Loans
Consumers with good credit are being put in subprime loans, a CR investigation found, and many are paying more than they can afford, putting them at risk of default
Two years ago, a Maryland resident with sterling credit financed a 2018 Toyota Camry with a 19 percent annual percentage rate loan and a monthly payment of about $823. By the time the loan is expected to be paid off, in late 2025, the borrower will have spent roughly $59,000—more than twice the car’s value and about what you would pay for a high-end Tesla Model 3.
When the borrower took out the loan, in November 2019, the average APR for consumers with a similar credit score was much lower, about 4.5 percent. The loan, issued by Santander Consumer USA, based in Texas, ate up more than 15 percent of the borrower’s estimated monthly income of around $5,400, which may have been too much for them to manage. Within six months, records show, they were delinquent on their bill.
The loan is among a database—of nearly 858,000 loans from 17 major auto lenders—that Consumer Reports compiled and analyzed as part of a yearlong investigation into the growing burden of car-related debt in the U.S.
Today, Americans with new-car loans make an average monthly payment approaching $600—up roughly 25 percent from a decade ago.
Most borrowers pay their loan with no problem. But in recent years, tens of thousands of consumers have found themselves in financial sinkholes after receiving high-interest, longer-term auto loans that, like the Maryland resident, put them at serious risk of default, CR’s investigation found.
This is happening as total auto loan debt held by Americans has increased dramatically over the past 10 years, surpassing $1.4 trillion—more than the gross domestic product of Australia. Because of recently skyrocketing prices for new and used cars, that debt is likely to grow even more.
“You’re not helping somebody to get a car if the odds are they’re going to lose it,” says Kathleen Engel, research professor at Suffolk University Law School in Boston who studies subprime financial products and is also the vice chair of CR’s board of directors. “That’s not getting somebody a car. That’s taking their money.”
CR’s investigation found that interest rates charged can be stratospheric; in some cases APRs stretch beyond 25 percent. But our analysis also reveals that consumers who are financially similar and have comparable credit scores can be charged wildly divergent interest rates. Even people with high credit scores can be charged exorbitantly.
What’s going on?
Experts say that CR’s analysis suggests a broad problem with the way car loans are arranged in this country: Dealers and lenders may be setting interest rates based not only on risk—standard loan underwriting practice—but also on what they think they can get away with. Studies show that many borrowers don’t know they should, or even can, negotiate the terms of a loan, or shop around for other offers.
Discrimination could be part of it, too. Other research suggests that people of color are more likely to be offered high-interest car loans, even when they have similar or even better credit than whites. But unlike federal data provided on mortgages, the data CR analyzed did not include any information on the borrowers’ race, age, or sex.
The auto lending industry also operates in a regulatory morass. Many states have confusing and contradictory laws regarding how high rates can be set, according to interviews with regulators in all 50 states and the District of Columbia. At the federal level, the Consumer Financial Protection Bureau has limited oversight of auto lenders.
Those who do get stuck with expensive car loans can face serious repercussions.
For one thing, it makes it harder to build the savings needed to purchase a car outright, says Pamela Foohey, a professor at the Cardozo School of Law in New York City who has published several studies on auto lending. Longer-term car loans—the average is now about six years—compound the problem, she says, trapping people in debt to fund a necessity like transportation.
“The trap for consumers, of course, is a boon to lenders,” Foohey says.
Falling behind on car payments can lead to repossession, triggering a cascade of other problems.
Lana Ash of Oklahoma and Dennis Lamar of Connecticut both had their vehicles repossessed last year in the middle of the pandemic, after getting stuck with high-APR car loans that proved to be more expensive than they could afford. Without a car, Lamar had to bum rides to doctors’ appointments. Ash had to take out another loan to fix a busted transmission on an old car.
“To this day, I still get emotional and upset about it,” Ash says.
Many Americans have faced similar outcomes. By spring 2021, an estimated 1 in 12 people with a car loan or lease, or almost 8 million Americans, were more than 90 days late on their car payments, according to a CR analysis of data from the Federal Reserve Banks of New York and Philadelphia.
Moreover, a significant number of auto loans nowadays come with negative equity from the outset. Almost half—46 percent—of the loans in the data we reviewed were underwater; that is, people owed more on the car—$3,700 on average—than what the vehicle was worth.
“It’s appalling that so many Americans are routinely overcharged for auto loans, relative to others in their credit score range,” says Chuck Bell, a financial policy advocate at CR. “In a competitive, efficient market, you would not expect to see this huge level of variation.”
A Data Desert
Very little data about car loans is publicly available. For this investigation, CR used data disclosed to the U.S. Securities and Exchange Commission in 2019 and 2020 to investors of auto loan bonds that must be made public. Altogether, CR statisticians analyzed about 858,000 loans made by 17 major lenders, including banks, financial firms affiliated with automakers, and companies that cater to lower-credit consumers, that were bundled together into investments as asset-backed securities.
The data contains details about the loan and the borrower, including their credit score, monthly payment, estimated income level, employment status, vehicle value, loan amount, whether there was a co-borrower, the make and model of the car, and more.
The data are not nationally representative: Only loans that were packaged into securities for investors are included, and some lenders are not included in the data from several states. But the data provide a close-up look at what some Americans pay, or overpay, when they borrow money for a car.
And they illustrate how, even though dealerships tend to draw the public’s ire for the car-buying experience, loan companies also play a key role.
Along with the data analysis, this article is based on a review of thousands of pages of regulatory filings, court records, trade publications, industry reports, financial records, public documents obtained through the Freedom of Information Act, and interviews with more than 90 federal and state regulators, advocacy organizations, consumers, lawyers, legal experts, academics, and industry groups.
The investigation found:
- A credit score doesn’t necessarily dictate the terms of the loan offered. Borrowers in every credit score category—ranging from super-prime, with scores of 720 and above, to deep subprime, with scores below 580—were given loans with APRs that ranged from 0 percent to more than 25 percent.
- Some high credit scorers get high-priced loans. While, on average, borrowers with low credit scores are offered the worst terms, about 21,000 borrowers with prime and super-prime credit scores, about 3 percent of the total borrowers in that group, received loans with APRs of 10 percent or greater—more than double the average rate for high scorers in our data.
- Many borrowers are put into loans they might not be able to afford. Experts say that consumers should spend no more than 10 percent of their income on an auto loan. But almost 25 percent of the loans in the data CR reviewed exceeded that threshold. Among subprime borrowers, that number is almost 50 percent, about 2.5 times more than prime and super-prime borrowers.
- Underwriting standards are often lax. Lenders rarely verified income and employment of borrowers to confirm they had sufficient income to repay their loan. Of the loans CR looked at, these verifications happened just 4 percent of the time.
- Delinquencies are common. More than 5 percent of the loans in the data—1 in 20, or about 43,000 overall—were reported to be in arrears. While delinquencies declined over the past year and a half, likely thanks to pandemic-related deferment programs, industry groups and regulators are bracing for a potentially sharp uptick in the coming months.
CR reached out to all 17 lenders covered in the analysis, as well as industry groups such as the American Financial Services Association and the National Automotive Finance Association. They declined to respond to many specific questions about CR’s findings; some didn’t respond at all. Some stated in general that consumers have a wealth of information to make the best choices for themselves and that numerous variables determine how loans are priced, not just what’s reported about credit score, employment, and income.
Industry groups and lenders contended that auto lending in the U.S. is heavily regulated and argued that the data CR reviewed doesn’t contain enough information to accurately compare the loans similarly situated borrowers received. They dismissed the number of delinquencies and high-credit borrowers being charged double-digit interest rates in the data as anomalies. For low-income consumers in particular, they say, their companies provide access to credit when banks have boxed them out.
“Consumers understand that rates will vary from creditor to creditor,” says Ed McFadden, a spokesperson for the American Financial Services Association. “They have ample opportunity to research and shop.”
But advocates say the car-buying process is unlike any other consumer purchase experience.
“It’s no wonder that there’s so much variability in the APR in the CR findings,” says R.J. Cross, tax and budget advocate for the U.S. PIRG, a consumer advocacy and political organization. “The price you pay and the financing you get has a lot more to do with how prepared for battle you are when you walk onto the showroom floor than your financial history.”
The APR Disparity
The practice of extending high-cost loans to borrowers is nothing new, nor is the Wall Street business of investing in securities composed of bundled loans. The business is seen as a safe bet, says Christopher Palmer, assistant finance professor at the MIT Sloan School of Management, because consumers prioritize their auto loan over other bills since having a car is so important to day-to-day life. It’s also easier to repossess a car, than, say, a home.
Perhaps for that reason, the number of auto loans issued to subprime borrowers has grown substantially over time. In the 1990s, such loans represented potentially as little as 10 percent of all auto loan originations, according to a 1998 paper in the American Bankruptcy Institute Journal. Today, it’s almost double that.
But in reality, it’s not just subprime borrowers who receive costly terms. Across the credit spectrum, loans CR reviewed ranged from 0 percent APR to more than 25 percent. Individuals with strikingly similar characteristics received wildly different terms.
Take for example, in 2019, when GM’s lending arm financed 73-month loans for two consumers—both living in California, both buying 2017 Chevrolet Trax SUVs valued at around $12,000. Neither borrower had a co-borrower or received financial incentives. They both earned between $5,000 and 5,500 per month, each financed about $18,000 in total in the transaction, and both had prime credit scores ranging from 660 to 719.
But one of the borrowers got a loan with an APR of 4.9 percent and a scheduled monthly payment of $283, while the other’s loan, a month later, had an APR of 14.1 percent and $383 monthly payment. Over the life of the loan, the first borrower will pay almost $28,000, roughly one-third more than the other borrower, who will pay less than $21,000. (GM declined to comment.)
Ryan Kelly, acting auto finance program manager at the Consumer Financial Protection Bureau, which regulates auto lending, says some of the variation might be explained by how auto financing in the U.S. generally works.
At least 80 percent of car financing is arranged through dealers, who serve as intermediaries for lenders, according to a 2020 paper published by the National Bureau of Economic Research. In a typical arrangement, the dealer submits a borrower’s information to lenders, receiving loan offers in return. Dealers then can then legally increase, or “mark up,” the interest rate, and they have been shown to typically do so by 1 to 2 percent.
The arrangement isn’t good for consumers, regulators and experts say: Dealers aren’t required to show consumers the offers they received, meaning they might not provide customers with the best deal.
“At a minimum, dealers should be required to disclose the different financing offers they get, and the interest rate markups they receive, so buyers can choose the best offer, or arrange for cheaper financing on their own,” says Chuck Bell, programs director for CR.
But while dealer markup has been cited before as one factor behind APR variation among similar auto loan customers, it doesn’t necessarily explain the disparities CR identified. For one thing, dealer markups are generally capped regardless of APR, says Paul Metrey, senior vice president of regulatory affairs at the National Automobile Dealers Association, and “there is no financial incentive for dealers to present longer-term or more expensive credit options to consumers.”
So what drives the variation in the loan data CR reviewed?
To assess it, CR statisticians built a modeling tool that looked at APR, controlling for the borrower’s payment-to-income ratio, when the loan was issued, whether a co-borrower was present, the length of the loan, the amount of equity in the car, or whether the purchaser received financial incentives on the loan, which might include a 0 percent interest introductory period.
None of these characteristics could fully explain the wide disparity in APRs offered.
“Sadly, this is all too common,” says Ian Ayres, a lawyer and economist at Yale University’s School of Management and Yale Law School who has studied disparate pricing in auto lending. “I’ve seen a surprising number of consumers with excellent credit who are nonetheless written into subprime loans with higher APRs.”
Erik Mayer, assistant finance professor at Southern Methodist University’s Cox School of Business, says the disparity is similar to findings in a study he co-published this year that found nonwhite borrowers pay more on average for auto loans than similarly situated white consumers.
“The fact that even some borrowers with high credit scores end up paying high interest rates illustrates the importance of credit shopping in this market,” he says.
Good Credit, Bad Loan
Whatever the reason, thousands of borrowers with good credit scores received loans with APRs more commonly associated with subprime consumers.
The average APR for car borrowers with prime and super-prime credit scores in the most recent quarter was 3.48 and 2.34 percent for new cars, respectively, and 5.49 to 3.66 percent for used cars, according to a recent report from Experian, a credit reporting agency.
Some lenders say they rely on proprietary credit scoring models, which would differ from the credit scores reported in the data CR reviewed, to price loans.
Yet nearly 21,000 borrowers— about 3 percent of all prime and super-prime borrowers in the data CR reviewed, representing $439.6 million in loans—had loans with APRs of 10 percent or higher. Several thousand had loans with APRs of 15 percent and above.
“Many consumers pay careful attention to avoiding debt and maintaining a high credit score, so that when it comes time to get a loan, they’ll get the best rates,” says CR’s Bell. “Borrowers with good or excellent credit will be outraged to learn they may have been overcharged by thousands of dollars for the loans they received.”
All told, consumers in the data CR reviewed with high APRs for their credit tier will spend $790 million more on their vehicles than if they had received average interest rates based on their credit score of our dataset.
Lenders and dealers may be taking advantage of consumer ignorance when offering finance options.
That’s because people often don’t act in their own best interest when buying a car, says Tobias Salz, assistant professor at the Massachusetts Institute of Technology’s economics department, who analyzed millions of loans in a recent paper he co-published. They tend to focus more on the car price and less on the financial terms, which they fail to negotiate, he says.
Other recent studies have identified similar consumer bad habits.
One co-authored by Palmer, the MIT finance professor, found that most consumers don’t shop around for the cheapest interest rate. Other research by him showed that a disproportionate number of consumers received monthly payment terms bunched around even dollar amounts, in $100 increments, suggesting that loans were often chosen based on monthly payments, not interest rates.
“If you’re only focusing on the monthly payment, then you have less of a sense if you’re paying too much for the car,” Palmer says.
Unaffordable Cars
The size of his monthly payment was foremost in his mind when Angel Maldonado went to buy a new vehicle in January 2020.
The 67-year-old needed something reliable and affordable. At the time, he was earning about $1,800 per month, according to an interview with CR.
Maldonado found a used 2018 Nissan Rogue SUV at a dealership near his home in Hartford, Conn. The dealer told Maldonado that to make the deal work he’d have to pay almost $600 per month on a six-year loan with a 17 percent APR, and he would need a co-signer. The dealer assured him he could refinance in eight months, according to a lawsuit Maldonado later filed.
Maldonado told CR through a translator that he needed the vehicle for his job as a building superintendent. Though the payment would eat up almost one-third of his monthly income, he felt he could make it work for the time being and agreed to the terms.
The dealer funded his loan through Exeter Finance, which is based in Texas. But when he tried to refinance, according to his complaint, Exeter said no such program existed. Maldonado, who says he lost his job in the meantime and was living on Social Security, was stuck with the loan.
“I am sick because of the nerves,” Maldonado says. “I don’t know what to do anymore.” (Exeter declined to comment, and the dealership did not respond to a request for comment. The lawsuit is pending.)
Some lending experts say consumers should try to spend no more than 10 percent of their monthly income on a car loan. More than 207,000 borrowers in CR’s data were spending above that amount, about 1 in 4.
Spending above that amount may pose serious risks. Daniel Parry, co-founder of Exeter and the company’s former chief credit officer, wrote in a May column in the Non-Prime Times, an industry publication, that a payment-to-income ratio of more than 14 percent leads to “50 percent higher defaults at every credit score level.”
Almost 74,000 borrowers—or 1 in 11—met that 14 percent threshold. (Parry declined to comment on the record.)
While many borrowers with good credit scores ended up with high payment-to-income-ratio loans, people with bad credit were particularly prone to such loans. About 20 percent of subprime borrowers had a payment-to-income ratio of 14 percent or higher, while just 6 percent of prime and super-prime borrowers did.
One hair-raising example: a January 2019 loan for a new Chevrolet Suburban financed by GM Financial, the lending arm of the automaker. The borrower, a Texas resident, had a prime credit score and received an interest rate of 13.55 percent and a scheduled monthly payment of $1,628 over more than six years. That chewed up about 15 percent of their income. When the loan is paid off, the borrower is expected to have paid more than $122,000 for the vehicle that was valued at $71,148. (GM Financial declined to comment.)
John Van Alst, an attorney and expert on auto lending at the National Consumer Law Center, a consumer advocacy nonprofit that represents low-income consumers in car-related issues, says people with low incomes and lower credit scores face the most difficulty with affordability. The data, he says, illustrates the lengths to which low-income borrowers often must go to buy a car.
“Lower-income people spend a higher percentage of their budget on cars out of necessity,” he says.
Little Verification
The lack of income verification is also a problem that can lead to loans going bad, something Oklahoma resident Lana Ash learned the hard way.
In April 2020, while shopping for a used car, she told a dealer she could spend at most $350 per month. Ash, 50, cannot work and receives just under $800 per month in disability income, she and her lawyers told CR. The dealer arranged financing for her to buy a Nissan Sentra sedan.
But when Ash received her first bill from the lender, Santander, she learned she owed $428 per month—about 20 percent more than she’d agreed to. Ash allegedly discovered the dealer had falsely reported that she made $5,500 per month in her loan application, according to a lawsuit she later filed. Santander, she claims, told her there was nothing she could do but pay up.
Santander ultimately repossessed her car in August 2020, her attorney says. Ash blames the lender for not verifying her information in the first place.
“I think they should take the steps to make sure the person can afford the payments,” Ash says. (The lawsuit remains pending. Santander declined to specifically comment on the case.)
Misrepresentations of income and employment have been a sticking point in the industry in recent years. Such misrepresentations led to about $4.4 billion in auto loan losses in 2020, according to a report this year by Point Predictive, a company that sells software to detect auto loan fraud.
But lenders in the data CR reviewed verified the income reported on credit applications just 4 percent of the time. Employment history was verified at an even lower rate.
Lenders and industry groups say that income and employment are among numerous variables that can be used when determining one’s creditworthiness and the loan terms that are offered.
“We conduct our business to large financial institution standards, which include rigorous risk, compliance, and controls around lending and loan servicing,” says Santander spokesperson Laurie Kight.
But failing to monitor the loans originating at dealerships has been a problem for Santander and other lenders before.
Massachusetts’ state attorney general, Maura Healey, for example, has reached settlements against multiple lenders in recent years, including Santander and Exeter, alleging they funded loans they knew consumers could not afford or were unfair and in violation of state laws. (Neither lender admitted wrongdoing.)
In a 2017 case against Santander, the state attorney general alleged that the lender predicted an estimated 42 percent of loans the company made through certain high-risk dealers to Massachusetts residents went into default or were expected to default. Yet the company continued to fund loans originating from dealers who inflated incomes and had issues arise.
Dealerships themselves have brought legal actions against the lender, too. One, Plaza Automotive in South Carolina, alleged in April 2020 that Santander at one point ceased verifying income reported on borrowers’ loan applications, leading to a high rate of defaults from its shop.
When those loans started to go south, Santander tried to cover the losses by forcing Plaza Automotive to buy them back, according to the lawsuit, arguing that Plaza was ultimately responsible for the bad loans.
Plaza disagreed. George Irby, Plaza’s chief financial officer, testified that if Santander had any concerns about the borrowers, it should’ve requested more information to verify an applicant’s income or employment.
“If they don’t ask for it,” Irby said in a hearing, “then we assume the bank didn’t need it.” (The lawsuit was settled. Plaza’s attorneys didn’t respond to a request for comment. Santander declined to comment.)
When Defaults Happen
Given the way the deck is stacked, some consumers struggle to pay their car loan—and many fail.
About 43,000, or 5 percent, of the loans in the data CR reviewed were reported to be delinquent. That tracks with recent data published by the Federal Reserve Bank of New York, which recently reported that 4.35 percent of total auto loan debt in the U.S. was about 90 days past due.
But among subprime borrowers, delinquency rates are much higher. According to the results of a survey presented at the annual Non-Prime Auto Financing Conference last fall, the average 30-day delinquency rate reported by the 28 nonprime lenders included in the report was about 11.2 percent for the fourth quarter of 2019. The repossession rate was around 13 percent in 2019—or roughly 1 in 8 vehicles financed by those lenders.
During the COVID-19 crisis, repossessions dropped nationwide as lenders deferred payments and the federal government provided Americans with stimulus checks. Cox Automotive, an industry analyst group, estimates that 1.3 million cars were repossessed in 2020, down from 1.7 million the prior year.
Enfield, Conn., resident Dennis Lamar is among those who lost their car amid the pandemic.
Lamar bought a used Toyota Tacoma truck at a local dealer in early 2019, putting down a $2,500 cash payment and receiving a $3,500 credit for trading in his older vehicle, according to a copy of his contract that CR reviewed.
Lamar, 55, says he earns about $80,000 annually as an insurance account manager and that before this loan he’d never held debt of any sort.
The dealer told him he needed to pay a 17 percent APR to finance the purchase over six years from Santander. Payments were $900 per month. Lamar made it work for a while, but by spring 2020, he fell behind. The lender gave him one extension, he says, but the truck was repossessed in June.
Without a car, he had to find rides to doctors’ appointments and to run errands. “Everything that I needed I had to rely on somebody else to do it for me,” he says. (Lamar sued the dealer and Santander, which both declined to comment, over the transaction. The case is pending.)
Lamar says he was eventually able to buy a new car—by taking money out of his 401k.
“If they had worked with me and were honest with me,” he said, “there could’ve been some arrangement for me to pay every dime I owed.”
What's to Come
Though delinquencies and repossessions declined during the pandemic, with the pandemic-related financial aid now coming to an end, regulators and industry groups are bracing for a potential sharp increase in consumers struggling with their car loans.
That trend may be more pronounced for lower-credit borrowers.
In June, Joseph Cioffi, a partner at the law firm Davis+Gilbert in New York City and an expert on subprime auto loans, published a survey of more than 100 auto lenders, investors, servicers, and more. Almost three-quarters of them said they expect subprime auto loan performance to deteriorate in the coming year.
That consumers may wind up in dire straits because they get auto loans with higher interest than their credit score merits is all the more reason to be concerned about what’s to come, advocates and experts say.
“Car financing is not designed with the consumer in mind,” says Cross at the U.S. PIRG, “and it’s letting far too many people fall into financial situations that end up hurting them.”
