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Car buyers should beware when taking out loans: Consumer Reports

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  • There isn’t a ton of data readily available on the auto loan landscape in the United States, so Consumer reports collected information on nearly 858,000 auto loans. It turns out it’s ugly there.
  • For example, over the past decade, the average monthly payment for a new car has climbed almost 25%, reaching almost $ 600 today. The total amount of auto loan debt in the United States today is approximately $ 1.4 trillion.
  • To make matters worse, even car buyers with good to excellent credit scores can be offered loans at absurdly high interest rates. What should a consumer do? Aggressively seek out the best rates and focus on the total cost and interest rate, not just the monthly payment.

    Of course, buying a car during a pandemic can be difficult, with shortages and long wait times, but there is another problem for car buyers, and this has nothing to do with a virus or the supply of semiconductor chips. Consumer reports recently collected data on nearly 858,000 auto loans from 17 major auto lenders and found that, in short, it’s a mess out there.

    New car prices are of course on the rise, but that’s not the only reason that the average monthly payment for a new car today is almost $ 600, a 25% increase from what ‘it was 10 years ago. The other reason is that there is not good monitoring of lending practices. As Consumer reports In other words, the auto credit industry “operates in a regulatory quagmire” and as a result, many consumers with very good credit find themselves stuck with subprime loans at high interest rates.

    The total amount of automobile debt held by Americans now stands at a not insignificant amount of $ 1.4 trillion, part of which takes the form of what RC called “money pits” or long term high interest auto loans which are a recipe for disaster for many who take them out. At worst, some have annual percentage rates above 25 percent, but even a 19 percent APR can mean buyers are paying way above the price on the sticker in the end.

    CR’s leading example in his research article 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 taken out. will be repaid in 2025. While the average loan for someone with this buyer’s credit score was 4.5 percent, the loan they got had an APR of 19 percent.

    And that’s not the only off-putting example. CR found someone from Texas who bought a new Chevrolet Suburban in January 2019 on a loan from GM Financial. Despite what RC Called a “blue chip credit score,” this borrower ended up with an APR of 13.55% and a monthly payment of $ 1,628 for over six years. This means an aggregate payment of over $ 122,000 for a vehicle valued at $ 71,148.

    This type of loan means that it’s not very surprising that one in 12 people in the United States with a car loan or lease (just under eight million people) have had more than 90 days of credit. delay in making a car payment in spring 2021. Almost half (46%) of car loans RC examined in the dataset were underwater, meaning the buyer owed more on the loan than the value of the vehicle. The average of these loans had a spread of $ 3,700.

    It is fair to use the term unscrupulous for some of the people who distribute money for auto loans. CR ‘Analysis of the data revealed that some dealers and lenders not only base the interest rate on normal things like risk, but “also what they think they can get away with”. Even though the data in the publication did not include ethnic information for borrowers, racial discrimination is common enough in the lending industry that it can have an impact on the rates offered to car buyers, RC noted. And even though financial experts suggest that a car loan should not account for more than 10 percent of a person’s income, CR data revealed that nearly 25 percent of borrowers and nearly 50 percent of borrowers at risk ended up with loans that ate more than 10 percent of a person’s budget.

    Another problem is that cars are simply more expensive now than in the past which increases the base amount needed to get a car in the first place. Data from the Saint Louis Fed shows that the average funded amount for new car loans from finance companies has increased from about $ 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 buyers loans that might not be secure or even based on their credit score. The amount they end up paying is just as high as the lender can name without the buyer laundering. And buyers who don’t know they can negotiate their loan terms are more likely to have their cars confiscated. Or, like Kathleen Engel, research professor at Suffolk University Law School and vice president of RCfrom the board of directors say, “You don’t help someone buy a car if there’s a good chance they’ll lose it… It’s taking their money.

    There are no easy fixes, but there are things consumers can do to protect themselves. First, try to fund an amount you can afford: RC Points out, buyers whose monthly car payments represent more than 10 percent of their monthly income are at a higher risk of default. And don’t do what too many buyers are doing and shop around. Look for the best loan rate and the best terms before signing on the dotted line.

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