Report: Car loans include billions in undisclosed charges

Introduction

Car buyers with a less than stellar credit history are spending billions of dollars in undisclosed interest charges, leaving them more vulnerable to defaulting on the loan and losing the car, according to a new report by the Center for Responsible Lending, a nonprofit, nonpartisan research and policy group.

The report, which examines the opaque world of hidden rate markups – interest rates added to loans of consumers above the rates they would ordinarily qualify for – underscores continuing consequences to consumers who remain unprotected despite last year’s bout of financial reform.

As iWatch News has reported, many of the same tactics that led to the mortgage meltdown – such as fudging facts on the loan application or charging consumers hidden fees – continue to plague auto loans, which are out of reach of the fledgling U.S. Consumer Financial Protection Bureau.

The Center for Responsible Lending report examines hidden rate markups, the interest rate car dealers can add to loans on top of the rate consumers qualify for based on their credit history. Because of such markups, consumers who financed a car through a dealership in 2009 will pay more than $25.8 billion in extra interest over the lives of the loans, a 24 percent increase from 2007, according to the report.

The undisclosed markups increase the odds of default by a subprime borrower by 12 percent, the group said. Odds of a car being repossessed go up by 33 percent.

The group also said it found that dealers are more likely to charge higher markups to consumers with weaker credit compared to those with better credit. Loans made in connection with finance companies that focus on subprime borrowers may have an additional undisclosed 5 percent kickback included by the dealer.

“Even for consumers who financed a vehicle through a dealer with a self-imposed cap of 2.5 percent on hidden markups,” says Delvin Davis, a researcher at the Center for Responsible Lending, “the added interest on that loan can be nearly $1700 for a new vehicle and over $1200 for a used one.”