Why Americans Are Falling Behind On Car Loans

Whether it's a sports car you're eager to rev up for a nice weekend trip or a safe minivan packed with entertainment features for your kids. Cars are everywhere. There are more than 275 million vehicles on the roads of the United States. People equate cars with freedom. There is this way in which it gives us the ability to explore, see and expand our lives. But in recent years, owning a car has become expensive, really expensive. More than 100 million Americans have an auto loan, and auto loan debt in the United States currently stands at $1.5 trillion, a record high. Aside from buying your first home, a new car or automobile is the second most important purchase for most people.

Given today's transaction prices and vehicle prices, financing is required to purchase these vehicles. In 2023, the average monthly auto loan payment for a new vehicle is $725, up from $650.20 in 2022. The average monthly payment for a used vehicle is $516 in 2023, an increase of 2% over the year former. Meanwhile, consumers tend not to rate their car-buying experience positively. It was a very quick process. And I felt like they just wanted me to sign as quickly as possible. For years, complaints and lawsuits have been appearing from left and right against lenders for alleged discriminatory and illegal practices. It undermines my confidence, our number one priority is our consumers.

And that's why we have implemented a variety of processes to ensure that this is the case. So what's going on in the auto loan industry and what can consumers do to make sure they're protected? Like any other loan, a car loan is a lump sum of money you are given to purchase a car, money that you are borrowing and must pay back over time. Once you've been approved for a loan, it often includes a down payment. You can take your newest used car off the lot, but it's yours alone as long as you make monthly payments.

With interest of course. Take 32-year-old Sean Miller, for example. In 2019, he bought a new car for just over $48,000. He deposited about $10,000 with an interest rate of 3.89% for a term of 72 months and is now making monthly payments of about $590. By the time he pays off the loan, he will have paid almost $5,000 in interest. And then there's a caveat: Until you pay off the loan in full, the lender owns the title and can repossess the car at any time if you fall behind on your payments. She was at work when her husband called her to tell her that her 2011 model had been stolen right in front of her East Orange apartment building with her one-year-old daughter, Hannah, in the back seat.

I just came back to work a little behind on my payments. The Repo guys pull into your driveway in the middle of the night and take your car. That's one of the ways they have these switches that can turn cars off. There are direct and indirect lenders. A direct lender would be your local bank, credit union, or an online lender. Once you've been approved for a loan through a direct lender, you can go to the dealership and compare prices for your car just like a cash buyer would for an indirect loan. That's when you go to a dealership and they give you financing options while you buy a car.

For example, you may be at a Subaru dealership and have chosen the perfect car for your family. The dealership submits your financial information to check Chase credit or checks and other financial factors and provides you with an interest rate and loan terms. The dealer then presents you with their interest rate and terms, and if you agree, you sign and you can drive away with your new car. It is more of an all-in-one process and it is estimated that around 80% of car

loans

are indirect. Now, regardless of whether you choose a new or used car or a direct or indirect loan, one of the most important factors that will determine the interest rate and loan terms you will be offered is the confidence the lender has in your ability to pay. . that loan.

They analyze your assets, liabilities, income, expenses, and most importantly, your credit score. Our main goal is to offer customers financial products they can afford. Chase Auto tells us they serve consumers with a credit score of 620 or higher, with the average credit score typically in the 700 range. Toyota Financial Services primarily has a prime credit portfolio, meaning it serves those with very high credit scores. We're told the average is 744. But we support a wider variety of businesses and those with perhaps a lower FICO score may come to the table with larger payments to help that affordability. Toyota is currently the market leader in auto

loans

and leases in 2022. 5.3% of total auto financing came from Toyota Financial Services and 4.4% came from Capital One Auto Finance.

The partnership we have with the divisions is what makes us extremely successful. We have to concentrate and focus on the customers, our guests and our dealer partners. According to Toyota, the company's financial services business primarily consists of providing financing to its own dealers and customers. The business also primarily offers installment credit and retail leasing. Sales revenue of the financial services business for the fiscal year ending March 2023 increased nearly 21% to 2,809.6 billion yen from 2022, equivalent to approximately $19.8 billion. That compares with its much larger automotive operations business, which saw an 18% increase in sales revenue in 2023 from a year earlier.

The Japanese car manufacturer is the largest in the world. The industry is going strong. We continue to recover. Consumers are buying vehicles, the demand is there and the loans are there. These companies are going out of business and the chip shortage continues to hamper the corporate inflation rate that is soaring to its highest level in more than 30 years. More than half of auto financing comes from nonbank finance companies, such as the financing arms of automakers. These lenders typically rely on short-term funding markets for their own financing. So with volatile markets, especially in the case of short-term financing markets that dried up during the global financial crisis, the last two decades have kept auto lenders on their toes, to say the least.

We went from a time of easy credit to a time where we have more credit restrictions. And because of the risk of inflation, credit is tightened even more, right, because of interest rates that have gone up a lot, that's a huge problem. In the first quarter of 2023, the average interest rate for a loan on a new vehicle reached 6.58%, up from 4.1% in 2022. This is a high in about 15 years. Average car prices are also high. This is partly due to supply chain shortages, increased demand and inflation. That also means Americans take out larger loans at a higher interest rate.

Over the past 10 years, outstanding loan debt has doubled. And auto loan debt in the United States is at a record high. Younger Americans are also in more trouble than ever. In 2020, the debt of Generation Z and Millennials had fallen into serious defaults worth $20 billion. I'm paying a lot of money right now for a car I don't really need. I've been fighting and fighting to sell it. If you sold it today, it would probably be a loss of $10-$15,000. Miller rented his car until someone crashed it. He tried to sell it but didn't get an offer that made financial sense.

It will take at least another three or four years of car ownership before you can pay off the loan. This is something that right now prevents me from being able to save to start a family. You're not alone in your concerns, and these changes are hitting low-income consumers the hardest, those with credit scores below 620. The Federal Reserve's interest rate increases are driving them out of the market. What we're seeing is another manifestation of what we saw during the subprime mortgage crisis, which is that people with lower incomes lost their homes and people with lower incomes have a hard time getting cars and getting mortgages, and They are also at greater risk of default.

Being out of the market is just one reason Americans have unfinished business with the auto loan industry. In addition to the notoriously unpleasant experience of buying a car, there have also been more complaints and lawsuits related to alleged discriminatory and illegal practices by auto lenders, then we have time to look at many of the car dealers I have personally seen, Not to say all of them, but definitely many of them do it in a very hasty way to obtain a high profit margin on a car and thus obtain a large commission, but not with the interests of the buyer, nor with their financial support and with their family. . mind.

Remember the indirect loan example I gave you earlier with Subaru and Chase? The bank or, in that example, Chase provides an interest rate and loan terms and then the dealer or Subaru presents you with their interest rate in terms that often go with the profit margin. The consumer never sees how much the finance company has said about the minimum interest rate and loan term they will accept. Say, for example, Toyota Finance says it wants the minimum interest rate to be 7%. The distributor can increase it up to 9%. And the consumer never finds out about that transaction. It violates all of our rules about fairness and the way markets work.

It is a convenience provided by the dealer in offering a service through the financing organization, as the margin becomes profit for the dealer and is sometimes shared with the Chase lender and many financial institutions place limits on the amount of premium that a dealer can add to the rate we offer. Setting boundaries ensures consistency of experience across a variety of distributors. Chase Auto did not provide us with its current limits. Limits on margins vary by state and lender, but are typically around 2.5 percentage points. Lack of transparency is just one reason, albeit a common one, why some consumers feel they are being treated unfairly.

One of the most recent controversies was this: The Massachusetts Attorney General reached a $7.6 million settlement with Toyota Motor Corporation to resolve allegations of illegal auto loan collection practices. The lawsuit claims that Toyota did not provide certain consumers with sufficient information about methods for calculating deficiencies left on their auto loans after their cars were repossessed. I cannot comment on that agreement. We remain adamant that, you know, our practices are very fair, you know, regarding these specific settlements and fines, I can't really comment because of the specificity of the state allegations and what might be behind them. In 2016, a different settlement was reached — that time for $21.9 million to resolve allegations that Toyota discriminated against Black and Asian borrowers by charging them higher rates than white borrowers.

And Toyota is not alone. I think probably every major automaker has been affected by lawsuits like this due to discretionary decision making when it comes to margins. Toyota also declined to comment on that deal. Or this industry-wide report by a former senior economist at the Federal Reserve Bank of Chicago. He claims that Black, Hispanic and Asian borrowers often pay hundreds and sometimes thousands of dollars extra in loan payments compared to their white counterparts. Do you have any idea why that might be? No, that's something I can't comment on all of our risks. Based pricing is based on the customer's FICO score and credit worthiness.

We don't even collect that type of data. That report is far from the only one to make such claims. According to this 2022 research paper, minority borrowers pay interest rates 70 basis points higher but default less than non-minority borrowers. These researchers say that each year more than 80,000 minorities are unable to obtain loans for which they would have been approved if they were white. Whenever people have subjective decision making. That's where the lack of transparency is very problematic. We spend a lot of time making sure we understand and offer affordable credit products to all consumers, regardless of theirbackground. A class action lawsuit was filed in 2017 alleging that Chase Auto violated the Fair Debt Collection Practices Act and state law by illegally repossessing consumers' vehicles between April 2013 and 2018.

In 2018, Chase Auto incorporated its company parent company, JP Morgan Chase, and the debt collector. agreed to pay $3.25 million to settle the case. What has Chase Auto done since then? Have business operations changed to avoid future accusations? We undergo a variety of tests of our systems and processes to ensure they comply with all rules and regulations. And there have been a series of examinations and reviews or awards, and we are confident that we are complying with applicable laws and regulations. For the first time in more than a decade, in 2022 the FTC proposed a rule that addresses unfair and deceptive financial practices by auto dealers.

Their proposed measures include banning bait-and-switch claims for fraudulent junk rates, surprise junk rates, and requiring full upfront disclosure of costs and conditions. I have dealt with predatory loans. Several members of my family have also had to deal with predatory loans in very uncertain situations. And it really behooves us to have some rules in place to make sure you know that these unscrupulous auto lenders aren't taking advantage of people. But in July 2023, the US House Appropriations Committee again took up a government spending bill that contained language preventing the FTC from implementing the proposed new rules. So what does that mean for consumers?

It means new legislation is probably not around the corner. Meanwhile, consumer advocates say more programs are needed to protect Americans who buy cars and that increasing transparency is key. My mother always knew how much bananas cost in each supermarket and she went to the store that had the cheapest price in terms of cars. We don't have that ability. Do you think a consumer should be able to see the rate directly from Chase regardless of whether or not they are getting pre-approved at home before going to the dealership or if they are sitting at the dealership and it's their first time trying to get an auto loan ?

Yes, I think transparency is essential. And so if a consumer goes to Chase.com, he can see the rate, he can see the terms and he should be able to see the rates and determine the dealership or where he gets his financial loan from. Until we see changes in the industry, Americans need to take care of themselves. Before you get an auto loan, experts recommend shopping around, checking your credit score, getting pre-approved online, going to your local credit union and bank, and finding out what types of offers you might be able to get before you sign anything.

We are currently finding that the lowest interest rates are at credit unions. Average rates within credit unions are closer to the 6% range, while at banks they are closer to seven and 8%. We now have online digital marketplaces. There are now a wide range of resources available to help clients understand interest rate competitiveness, the terms they are getting, and arm themselves with the best information possible. In 2020, Toyota launched smartpath, a digital retail tool that allows customers to purchase cars and apply for financing online. This show room concept came about so that when customers and guests are online, researching what type of vehicle they want, they can have a similar and transparent process.

If you have the means, go to a second, third, or perhaps fourth dealer to compare rates and terms and stay away from Buy Here, Pay Here dealers, who typically offer the highest interest rates, sometimes up to 20%. Do your research, ask questions and don't give up. Even if it's been a long, tiring, mentally draining day. We all know the feeling of not wanting to see another number, but don't let that push you to sign on the dotted line. If you're not ready, tell the dealer you need more time and they'll come back. Finally, vote. There are tremendous problems and tremendous solutions.

And those solutions will only happen if the politicians who make decisions about federal law in particular are willing to take consumers into account until we can get politicians to commit to protecting consumers, we won't have solutions.