6 Takeaways From Consumer Reports' Car Loan Investigation

Many borrowers are paying more than they should, according to our analysis of nearly 858,000 auto loans

Over the past decade, auto loan debt held by Americans has skyrocketed, surpassing $1.4 trillion—more than the gross domestic product of Australia.

And Americans with new car loans today are paying a lot more every month, up more than 25 percent from a decade ago. 

To understand why this is happening, and to investigate the effect on consumers, Consumer Reports assembled and analyzed a dataset of almost 858,000 auto loans from 17 major lenders that were bundled into bonds sold to investors in 2019 and 2020. Details about these loans are required to be made public by the Securities and Exchange Commission, including information about the terms of the loan and the borrower’s finances. A vast majority of the loans were arranged through a dealership, which is how most Americans finance their cars.

The data, while not nationally representative, provides a close-up look at what some Americans might pay—or overpay—when they borrow money for a car. 

Here’s what we found in our investigation, which also included a review of thousands of pages of court records, industry reports, and other documents, plus interviews with more than 90 regulators, car loan researchers, and other experts.

1. Similar Consumers Got Very Different Loans

The cost of borrowing was all over the map and often not tethered to the borrower’s credit score. Some borrowers with super-prime credit scores—720 or higher—were given loans with a 0 percent annual percentage rate. Others with similar scores got loans with APRs over 25 percent. We found the same wide range of APRs when we looked at deep subprime (scores below 580) and prime (660 to 719) borrowers. 

And we found examples of loans with vastly different terms given to borrowers with almost identical finances—for the same car.

“Sadly, this is all too common,” says Ian Ayres, a lawyer and an 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 high APRs.”

2. Dealers and Lenders May Charge What They Think They Can Get Away With

To understand why interest rates varied so much among borrowers with similar credit scores, CR statisticians considered numerous factors, including the 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, and whether the purchaser received financial incentives on the loan. None could fully explain the vast differences in costs.

So what’s going on? Experts CR spoke with said dealers and lenders may be setting interest rates based not only on risk—standard loan underwriting practice—but also partly on what they think they can get away with. Studies show that many borrowers don’t know that they can negotiate the terms of a loan or shop around for other offers, or even that they should.

3. Some Customers With Good Credit Got Pricey Loans

Borrowers with credit scores of 660 and higher had average APRs ranging from 3.73 to 5.94 percent. But nearly 21,000 consumers in those credit tiers—about 3 percent of the entire group—paid exorbitant rates of 10 percent on up to more than 25 percent. 

Over time, the cost of those high interest rates can be significant. A typical person among that group of borrowers would shell out $4,500 more over the life of the loan than if they paid average rates.

4. Many People Were Given Loans They Couldn't Afford

Lending experts recommend that consumers spend no more than 10 percent of their income on car debt. That’s because paying more than you can afford poses serious financial risks, including default.

But in our data, nearly 25 percent of borrowers spent more than that on a car loan.

People with low credit scores tend to have lower incomes. And in CR’s data analysis, those with low credit scores were particularly likely to spend more than 10 percent of their monthly income on car loans.

Of course, for some people, owning a car is not so much a choice as a requirement in modern America if they want to hold a job, see a doctor, and shop for food. 

“Lower-income people spend a higher percentage of their budget on cars out of necessity,” says John Van Alst, an attorney and expert on auto lending at the National Consumer Law Center, a consumer advocacy nonprofit.

5. Income Verification Was Rare

When financing a home, lenders typically verify a borrower’s income and employment. But in the car loans CR reviewed, lenders verified income just 4 percent of the time and employment status even less often.

Consumers like Oklahoma resident Lana Ash learned the hard way about lax underwriting. In April 2020 she received a loan arranged by a dealer through the lender Santander Consumer

But when Ash received her first bill from Santander, she learned that she owed $428 per month—about 20 percent more than she had agreed to with the dealer. She allegedly discovered the dealer falsely reported she made $5,500 a month on her loan application, according to a lawsuit she later filed. 

Santander ultimately repossessed her car last August, her attorney says. (The lawsuit is pending. Santander declined to comment.)

“I think they should take the steps to make sure the person can afford the payments,” Ash says.

6. Delinquencies and Repossessions Were Common

With so many people devoting so much of their monthly income to car loans, you might expect a lot of delinquencies and repossessions. And there are. 

Five percent of the borrowers—or 1 in 20—were reported to be delinquent on their loan.

After 30 to 90 days, lenders generally start the process of repossessing cars. Consumers with low credit scores are more likely to be affected. 

A 2020 survey of 28 nonprime lenders, representing billions of dollars’ worth of auto loans, found that they had a repossession rate of around 13 percent in 2019, or roughly 1 in 8 vehicles financed by them. 

Between 2017 and 2019, 1.6 million to 1.7 million cars were repossessed annually, industry estimates show