Auto debt is out of control, you are conned

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Consumer Reports just released the results of a year-long study on the latest trends in auto loans and auto payments. The resulting information highlights how explosive debt growth has been over the past 10 years and the arbitrary way borrowers are now treated.

In short, we are all swindled.

As vehicle prices skyrocket and associated loans get longer than ever before, dealerships and lenders seem to be operating in ways that allow them to generate the highest profit margins, regardless of established frameworks designed to act as a safeguard. This has resulted in American citizens holding a record $ 1.37 trillion in auto debt, and customers with good credit are treated no differently than those who fall into the subprime category. Unfortunately, the problem only seems to be getting worse, as new economic perils only make things more expensive. Meanwhile, data from the Federal Reserve Bank of New York projects the national auto debt to swell to $ 1.42 trillion by the end of the year.

By comparison, Americans only had to pay $ 710 billion in 2011. But the amount of accumulated debt is only part of the story. Consumer Reports used the study to claim that vehicles consume a growing share of household income, citing nearly 858,000 loans from 17 major auto lenders.

Of RC:

Today, Americans with a new car loan make an average monthly payment of about $ 600, an increase of about 25% from a decade ago.

Most borrowers repay their loans with no problem. But in recent years, tens of thousands of consumers have found themselves in financial pitfalls after receiving long-term, high-interest auto loans that, like the Maryland resident, put them at serious risk of default. revealed CR’s investigation.

It comes as the total auto loan debt held by Americans has grown dramatically over the past 10 years, topping $ 1.4 trillion – more than Australia’s gross domestic product. Due to the recent surge in new and used car prices, this debt is likely to increase even more.

“You’re not helping someone buy a car if there’s a good chance they’ll lose it,” says Kathleen Engel, a research professor at Suffolk University Law School in Boston, who studies financial products at risk and is also vice-president of the CR Board of Directors. “It’s not to give someone a car. It’s taking their money.

Worse yet, it’s not uncommon to see APRs exceeding 25 percent and lenders don’t seem to care who the customer is. While credit scores were invented in the 1950s, under the auspices of providing a standardized and impartial means of determining the creditworthiness of individual clients, the FICO scoring system in use today did not emerge until 1989. But he has often been accused of allowing lenders to promulgate predatory stipulations on loans given to those whose numbers are less than desirable, especially as the system has been more widely used.

Credit scores no longer apply exclusively to mortgage applications and loans. They are now included in some rental contracts and even in job applications. It got to the point where we started to see a pullback, often with claims that rating doesn’t accurately represent debt risk and functionally serves to prevent some people from achieving upward mobility. Even though we’re not gonna dive into this, RC asserted that the arbitrary nature of credit scoring has become a serious problem.

The outlet suggested that dealers and lenders set interest rates based on something other than standard loan underwriting practices. Instead, they conduct their business the ‘they think they can get away with’ way because many borrowers have no idea that they can (and should) negotiate terms or set up lenders / dealers. against each other in the hope of getting a better deal. This is partly explained by legal and regulatory disparities between states. Although the result is a matter of focus, as it risks permanently upsetting the economy when a significant percentage of the population can no longer afford to drive:

On the one hand, it’s harder to build up the savings needed to buy a car, says Pamela Foohey, a professor at the Cardozo School of Law in New York who has published several studies on auto loans. Longer-term auto loans – the average now is around six years – compound the problem, she says, trapping people in debt to finance a necessity like transportation.

“The trap for consumers, of course, is a boon for lenders,” says Foohey.

Delay in 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 amid the pandemic, after getting stuck with high APR auto loans that turned out to be more expensive than they were. could not afford it. Without a car, Lamar had to go to his doctor’s appointments. Ash had to take out another loan to fix a broken transmission on an old car.

“To this day, I’m still emotional and upset about this,” Ash says.

Many Americans have faced similar results. In the spring of 2021, about 1 in 12 people with a car loan or lease, or nearly 8 million Americans, were more than 90 days late in paying for their car, according to a CR analysis of data from the Federal Reserve Banks of New York and Creme Philadelphia.

The resulting scenario has left us with a non-comparative auto market where large corporations and banks can leverage their own customers more effectively. RC claimed that 46% of the more than 800,000 loans reviewed were underwater, with owners owing $ 3,700 more (on average) than the actual value of the vehicle. But we’re only scratching the surface at how dark it all gets.

Consumer Reports used information disclosed to the U.S. Securities and Exchange Commission in 2019 and 2020 to auto loan bond investors, supplementing its research pool with thousands of pages of regulatory filings, court records, trade publications, industry reports, financial records, public documents obtained by 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.

This data has led to some achievements, starting with the fact that your credit score is largely arbitrary when it comes to determining how bad your auto loan will be. While there was a prevalence of individuals with scores above 720 for receiving better terms, literally everyone (including subprime borrowers) had APRs ranging from zero to 25%. RC Also worried that lenders would intentionally give clients loans they couldn’t afford, with more than half of all at-risk borrowers getting stuck with payments over 10% of their annual income. But hardly any of the lenders bothered to verify this, so 96% of all auto loans go to people whose income has never been verified.

It has also resulted in an increase in delinquencies in recent years and a staggering increase in the amount of debt carried by Americans. But what is perhaps most alarming is how much no one seems interested in adhering to the underwriting practices that would have been put in place to make things run smoothly in the fairest way possible. Credit ratings seem to be used to punish the subprime market without really offering much protection to those with good ratings.

Consumer reports said he contacted all 17 lenders covered by the analysis, in addition to industry groups such as the American Financial Services Association and the National Automotive Finance Association. Some chose not to answer, with everyone refusing to answer all of the questions asked. Most also claimed that consumers have the ability to make informed decisions for themselves and that there is a wealth of information online for those interested.

Industry groups and financial institutions have also claimed that auto loans are sufficiently regulated in the United States, suggesting that RC the research failed to “contain enough information to accurately compare loans received by borrowers in a similar situation.” Double-digit interest rates were dismissed as anomalies while the increased number of defaults and foreclosures were dismissed entirely as they saw themselves as the only way some customers could get car loans.

“Consumers understand that rates vary from creditor to creditor,” said Ed McFadden, spokesperson for the American Financial Services Association. “They have ample opportunity to research and shop.”

Since extended loan terms and a slightly higher interest rate can actually add thousands of dollars to even a low-cost vehicle, it’s not hard to see why RC is so critical of modern lending practices. There really is no other way to make this work. Consumers are either morons, unworthy of being offered fairer deals, or financial institutions (and dealer middlemen) are predatory assholes who never seem to take responsibility for their actions. And all of this will continue to be exacerbated as vehicle prices rise and automakers attempt to shift to a direct sales model that further negates the ability of customers to negotiate payments.

It’s as if modern security requirements make it technically impossible for new manufacturers or my other anti-regulatory rants to exist. RC identified several industries working together to use existing principles in ways that make them the most money. If you have some spare time, I strongly suggest that you read the entire report and inspect the relevant investigative documents. It’s pretty good, loaded with specific examples of the aforementioned issues, and written by Ryan Felton – who is adept at putting together those kinds of stories.

[Image: Gretchen Gunda Enger/Shutterstock]

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