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  • There's not a ton of easily available data on the auto loan landscape in the U.S., so Consumer Reports collected information on almost 858,000 car loans. Turns out, it's ugly out there.
  • For example, over the past decade, the average monthly payment for a new car climbed almost 25 percent, to almost $600 today. The total amount of auto loan debt out there today in the U.S. is around $1.4 trillion.
  • Making matters worse, even car shoppers with good to excellent credit ratings might be offered loans at absurdly high interest rates. What's a consumer to do? Shop around aggressively for the best rates, and focus on the total cost and the interest rate, not just the monthly payment.

    Sure, car shopping during a pandemic can be difficult, what with shortages and long wait times, but there's another problem for car buyers out there, and this one doesn't have anything to do with a virus or the supply of semiconductor chips. Consumer Reports recently collected data about almost 858,000 car loans from 17 major auto lenders and found that, in short, it's a mess out there.

    New-car prices are way up, of course, but that's not the only reason why the average monthly payment for a new car today is almost $600, a 25 percent increase from what it was 10 years ago. The other reason is that there isn't good oversight of lending practices. As Consumer Reports put it, the auto lending industry "operates in a regulatory morass," and as a result, many consumers whose credit is just fine are finding themselves stuck with subprime loans at high interest rates.

    The total amount of auto loan debt held by Americans now sits at a not-insignificant $1.4 trillion, and some of that takes the form of what CR calls "financial sinkholes" or high-interest, long-term auto loans that are a recipe for disaster for many people who take them out. At their worst, some have annual percentage rates above 25 percent, but even a 19 percent APR can mean buyers are paying far, far above the price on the sticker in the end.

    CR's lead example in its article about the research describes a borrower with "sterling credit" who bought a new 2018 Toyota Camry two years ago and will end up paying around $59,000 for it by the time the loan is paid off in 2025. While the average loan for a person with that buyer's credit score was at 4.5 percent, the loan they got had a 19 percent APR.

    And that's not the only off-putting example. CR found someone from Texas who bought a new Chevrolet Suburban in January 2019 with a loan from GM Financial. Despite what CR calls a "prime credit score," this borrower ended up with a 13.55 percent APR and a monthly payment of $1628 for more than six years. That means an overall payment of more than $122,000 for a vehicle with a value of $71,148.

    This kind of lending means it's not a huge surprise that one in 12 people in the U.S. with a car loan or lease (just under eight million people) were over 90 days late making a car payment as of spring 2021. Almost half (46 percent) of the vehicle loans CR looked at in the data set were under water, meaning the buyer owed more on the loan than the vehicle was worth. The average such loan had a discrepancy of $3700.

    It's fair to use the term unscrupulous for some of the people handing out auto loan money. CR's data analysis found that some dealers and lenders were not only basing the interest rate on normal things like risk but "also on what they think they can get away with." Even though the publication's data didn't include ethnic information for borrowers, racial discrimination is common enough in the lending industry that it could impact the rates car buyers are offered, CR said. And even though financial experts suggest an auto loan should not make up more than 10 percent of someone's income, CR's data found that almost 25 percent of borrowers and almost 50 percent of subprime borrowers ended up with loans that ate up more than 10 percent of a person's budget.

    Another problem is that cars are simply more expensive now than in the past, which drives up the base amount needed to get a car in the first place. Data from the Saint Louis Fed shows that the average amount financed for new-car loans at finance companies went from around $25,000 in 2009 and 2010 to $33,000 – $34,000 in 2021.

    Putting all of these facts together reveals a lending landscape that, in the real world, offers car shoppers loans that might not be safe or even based on their credit score. The amount they end up paying is just as high a rate as the lender can name without the buyer blanching. And buyers who don't know that they can negotiate their loan terms are more likely to end up with their car being taken away. Or, as Kathleen Engel, a research professor at Suffolk University Law School and vice chair of CR's board of directors, put it: "You're not helping somebody to get a car if the odds are they're going to lose it . . . That's taking their money."

    There's no easy solution, but there are things consumers can do to protect themselves. First, try to finance an amount you can afford: As CR points out, buyers whose monthly car payments are more than 10 percent of their monthly income are at higher risk of defaulting. And don't do what too many buyers do and fail to comparison shop. Look around for the best loan rate and terms before you sign on the dotted line.

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