Under the hood: auto loans scrutinized as discriminatory

When it comes to cars, whether it’s a buyer’s market or a seller’s market, research shows that African Americans often come out of it deceived. Auto dealerships often work with third-party lenders, such as banks or credit unions, to provide financing options for consumers. Once this “indirect” lender offers the car dealership an interest rate on an auto loan, the dealership is allowed to mark up that rate to the buyer for additional compensation.

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

On loans made through the concessionaire, the concessionaire can mark up the interest rate above the consumer’s creditworthiness. This interest rate increase, also known as the “dealer’s reserve” or “dealer’s stake,” is described by dealers as how they are compensated for the time spent putting together a financing agreement. . However, since consumers generally don’t know what to expect, the mark-up is often a hidden cost to the consumer.

The report found that in over 60% of cases, non-white people who were more skilled than their white counterparts were given more expensive options. As a result, discriminated against people of color paid an average of $ 2,662 more over the life of their loans.

In one case, Ally Bank charged more than 235,000 minority borrowers higher interest rates for auto loans between 2011 and 2013. The bank was then ordered to pay $ 80 million in damages to Afro borrowers. -Americans, Latins, Asians and Pacific Islanders and $ 18 million in penalties.

Legislation introduced in 2013 was later repealed under the Trump administration, sending car buyers either to a level playing field or to hidden and costly traps.

Delvin Davis of the Center for Responsible Lending, a nonprofit consumer research and advocacy group, conducted the research on auto loans. The author of “Non-Negotiable: Negotiating Doesn’t Help African Americans and Latinos on Dealer-Funded Auto Loans,” said black and Latino buyers are often tricked into costly and overpriced add-ons.

“People of color are more likely to ask the dealership to say they are getting the ‘best available rate’ and to be told that add-ons are required purchases. Plus, people of color are more likely to ignore dealer interest rate increases, ”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 that an educated consumer is the best customer, Davis advises black and Latino consumers to use their banks or credit unions to get pre-approved auto loans before visiting an auto showroom. He also suggests avoiding unnecessary “add-ons”, including extended warranties, which can be cheaper when purchased from a third party.

“Once you have that approval, you basically take that check to the dealership and it can become a good bargaining chip that you can use,” Davis said. “It is the consumer’s responsibility to make sure that you understand everything that is in your contract and are not afraid to ask questions.”