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By Paul Reynolds
October 30, 2021
High angle view of saleswoman and customer going over paperwork in a car dealership
Getty Images

A great job and a strong credit score should qualify you for the best terms on a car loan. But if you are not careful, you still could end up paying far more than you need to.

According to two new studies from Consumer Reports and the Consumer Financial Protection Bureau (CFPB), what you pay to finance your car might not depend as much on your finances as you might hope. Both studies found rates for auto financing range widely, even for those who qualify as less risky customers.

While a number of factors are at play, the findings raise troubling questions about how equitably the car-loan industry is treating its diverse population of customers. Consumer Reports concluded that “dealers and lenders may be setting rates not only based on risk -- standard loan underwriting practice -- but also partly what they think they can get away with.”

The magazine, which is also an advocacy group, is calling on the CFPB to investigate that possibility, and is also urging consumers to sign a petition asking the agency to do that. While it may be a long time before auto lenders -- and other institutions -- correct their flaws, in the meantime there are steps you can take to make sure you get the best possible rate.

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Similar customers, differing rates. What gives?

Some of the disparities the studies found in rates are stark, even for comparable borrowers buying the same or similar cars. Consumer Reports cites two $18,000 loans by GM’s financing arm to similarly well-qualified California buyers to buy 2017 Chevrolet Traxs. One buyer received a rate of 4.1%, the other a whopping 14.1%.

The CFPB report focused on buyers with subprime credit and found the APRs charged to those less qualified customers varied from 10% to more than 20%.

To some extent, according to the CFPB study, disparities in how similar customers and loan applications are treated can be credited to the type of lenders they visited, along with such factors as how financially prepared the particular place is to absorb losses from loan defaults.

But Consumer Reports concluded those “hard” factors go only so far to explain the differences across the marketplace. Data on car-loan buyers is scarcer than for those who get mortgages, whose race, age, and sex are tracked by the federal government.

But the magazine says research suggests race plays a role in the terms of car financing. A 2021 study co-published by Erik Mayer, assistant finance professor at Southern Methodist University’s Cox School of Business, found that nonwhite borrowers pay more on average for auto loans than similarly situated white consumers.

What the findings mean for car loan shoppers

Both Consumer Reports and the CFPB say further research is required to better identify the underlying reasons for the unpredictability in what consumers may pay for car financing. Until that work is done, here’s how to best protect yourself when shopping for a car loan.

Get pre-approval before you shop

While the dealer will invariably pitch you financing, even for a used car, don’t make it the only place you shop for a loan. We recommend getting pre-approved for a car loan of up to a certain amount even before you begin to kick tires at dealerships. The dealer may eventually be able to offer a better deal on financing, but having a loan secured ahead of time gives you a strong starting point for getting the best deal.

Even if you have no pre-approval yet, consider telling the salesperson you plan to get one. And in advance of beginning to shop, research the current range in APRs and other loan terms being offered to borrowers like you, so you can credibly say you’ve looked into rates and look forward to seeing the best offer from this salesperson.

Negotiate the loan terms, and be clear on where they settle

As Consumer Reports notes, studies show that many borrowers don’t know they can negotiate the terms of a loan or “that they should do so.” Also, be sure you’ve clarified the terms, and seen them in writing, before you sign on the loan. Consumer Reports cites a case of a borrower who made clear she could afford a payment of only $350 a month, only to receive a first monthly bill of $428. Sure, negotiations for a car and its financing may be a little more challenging at the moment, due to a shortage of vehicles for sale and high prices, but it is always worth trying to do so.

Show you’ve done your homework

You of course can’t change your race or other attributes that may unduly influence salespeople. But showing savvy about the car-loan process and current loan rates can help reduce any perception that you’re an easy mark for being overcharged.

As you sit down to talk loan terms, consider letting would-be lenders know upfront of the research you’ve already done. If you’re armed with a pre-approval from another lender, have it in hand and let the sales rep know you do -- even if you don’t yet reveal its rate.

All other things being equal, the more informed you look as a customer, the lower the chance you’ll be perceived as a neophyte -- and the higher the chance of getting a fair rate for your loan.

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