What a Consumer-Friendly Future for Auto Lending Might Look Like

Here are four changes that could make it easier for you to find a good deal on a car loan

An illustration of a giant hand handing a percentage sign from behind a curtain while a person looks behind the curtain for more rates. Illustration: Jason Schneider

An investigation by Consumer Reports into auto lending raises serious questions about how the system is often unfair to consumers. 

For one thing, we found that some consumers who are very similar in terms of their income, credit score, and even the type of car they’re buying can be offered loans with wildly divergent terms. 

We examined nearly 858,000 car loans and found that the problem doesn’t affect just those with poor credit scores. Some people with excellent credit—the ones you’d think would get the best terms—are offered exorbitantly expensive loans, CR found.

Experts have no shortage of ideas for ways to make the system more equitable. Here are four key policy changes that could be made at the state or federal level, and could change how you finance your vehicle.

The loan selected by the dealer is not necessarily the loan that is best for the consumer.

Ryan Kelly,

acting auto finance program manager at the Consumer Financial Protection Bureau

1. You'll Be Able to Easily Compare Car Loans

Most people let the dealership handle the loan paperwork rather than going directly to a bank or credit union. Dealers typically shop around at various lenders to fund the loan, perhaps as many as nine, according to a 2020 study published by the National Bureau of Economic Research

More on the Problems With Car Loans

But “the loan selected by the dealer is not necessarily the loan that is best for the consumer,” says Ryan Kelly, acting auto finance program manager at the Consumer Financial Protection Bureau. “Consumers often do not realize that auto dealers are not required to select the cheapest loan,” and instead may present one that provides the most profit for them.

A requirement that dealers put loans up for bid and then tell borrowers about all of the offers could correct this, says Ian Ayres, a lawyer and an economist at Yale University’s School of Management and its law school who has studied disparate pricing in auto lending

Chuck Bell, programs director at CR, agrees. “Consumers would be much better served by a financing model where they can choose the best of competing loan offers,” he says. “In the meantime, however, we also believe dealers should be required to disclose all the loan offers they currently receive in a clear, understandable way, because it’s blatantly unfair to conceal that information.”

“Many dealers might still only offer the higher-cost loan options they receive compensation for,” Bell adds, “but ending the secrecy is a first step toward a fairer sales process.”

2. You'll Be Warned When Offered a ‘High-Cost’ Loan

That’s a federal protection provided to people shopping for home mortgages but not to those seeking auto loans. Home buyers offered a mortgage with an annual percentage rate that’s 6.5 percentage points higher than the average rate for people with good credit must be alerted that their loan is considered “high cost.” Presented with that info, they may choose to shop around for a better loan.  

A similar model could work for car loans, Ayres says. It could “help protect car buyers if dealerships had to warn them when they were likely paying too much for their loan.” And it could be especially helpful to low-income borrowers buying used cars, who are more likely to get stuck with high-interest loans, according to research from the CFPB.

3. You'll Have a Chance to 'Cool Off' Before Accepting a Loan

A three-day waiting period between when a car dealer offers a loan and a borrower accepts it could help in several ways, according to an article by Adam Levitin, a Georgetown University law professor.

For one thing, it might help borrowers avoid discretionary add-ons, such as vehicle service contracts or supplemental gap insurance, which dealers often try to load into loans. And it might motivate borrowers to shop around for loans through a bank or credit union.

Stop Overcharging for Car Loans!

Sign CR’s petition to the Consumer Financial Protection Bureau to ensure that auto loans are fairly priced.

4. More Data on Car Loans Will Be Available

Under federal law, mortgage lenders must release certain information about the loans they make, including the race and income (but not the names) of their borrowers. That helps researchers and the public better understand problems such as redlining and discrimination in the housing market. 

Auto lenders are under no such obligation. “That makes it far harder to understand—and fix—the inequities we know exist in the car lending world,” Bell says. 

Head shot of Ryan Felton, a CR author of investigative reports and special projects

Ryan Felton

I'm an investigative journalist with an appetite to cover anything and everything. My job and goal is to dig into complicated issues that affect people's health, safety, and bottom line. I've covered everything from dangerous tires to subprime lending to corporate malfeasance. Got a tip? Drop me an email ( ryan.felton@consumer.org), or follow me on Twitter ( @ryanfelton) for my contact info on Signal.