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Black Car Buyers Pay Higher Interest Rates

Situation Has Worsened in Recent Years, Study Finds

May 14, 2007

• States Want Stronger Used Car Rule • Industry Troubles Cloud LA Car Show • Carmakers Get Neither Love Nor Money From Congress • Taxpayers Headed For Automotive Bailout • Time May Be Running Short for U.S. Carmakers • Feds Move Closer to Carmaker Bailout • New-Vehicle Buyers Turn to the Web in Record Numbers --- • More about Auto Sales ...

Car shoppers usually arrive at the car lot determined to negotiate the best price on a new or used car. But no matter what price they finally arrive at, African-American car buyers usually end up paying more in interest charges when they sign the loan papers.

An analysis of the Federal Reserve Board Survey of Consumer Finances data, conducted for the Consumer Federation of America, finds African-Americans typically pay a higher interest rate on car loans that white consumers, and that this “rate gap” is increasing.

On 2004 loans for new car purchases, blacks paid a typical (median) rate of 7.0 percent compared to a typical rate of 5.0 percent for all borrowers. On used car loans, African-Americans paid a typical rate of 9.5 percent compared to a typical rate of 7.5 percent for all borrowers.

This rate gap of two percentage points is much higher than the rate gaps of 1.3 and 1.2 percentage points for 2001 new and used car loans respectively reported by the Fed.

A far higher percentage of African-Americans were likely to pay auto loan rates of at least 15 percent, the study found.

For new car loans, in 2004 6 percent of African-American borrowers paid this much, compared to only 2 percent of all Americans. For used car loans, 27 percent of black borrowers paid this much, compared to only 13 percent of all borrowers.

The percentages of black households and all other households with at least one auto loan differed little -- 32% of all African-American households and 35% of all households.

“It's hard to believe that any differences in credit-worthiness explain all of these rate gaps,” said Stephen Brobeck, CFA's Executive Director. “African- Americans can take steps to lower their auto loan costs. Most importantly, they should call their bank or credit union for an auto loan rate quote before talking about financing with a car dealer or finance company.”

Calling one's bank or credit union for a rate quote will minimize the chances of a car dealer marking up the loan rate above the risk-related "buy rate."

Detailed research by academics, earlier this decade, of data on millions of auto loans revealed that minorities were far more likely to have their auto loan rates marked up than non-minorities. As a result, courts ordered most major car finance companies to cap rates, usually at 2-3 percentage points above the buy rates, and provide funds for minority-related consumer education.

CFA utilized the services of Professor Catherine Montalto, a professor at The Ohio State University to analyze the latest Survey of Consumer Finances data, which was collected in 2004 and released last year. These data are for a representative sample of about 3,000 American households.

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