The CFPB says the problem is greater with used vehicles because the interest rate on a used car loan is typically higher than for a new car. The agency points to data showing that the consumer price index (CPI) for used cars and trucks increased by 40% percent since January 2021, while the CPI for new cars increased by just 12%.
As car prices continue to rise, the CFPB worries that loan amounts will continue to rise. However, that may not be immediately apparent to consumers since growing loan lengths may make those larger loans seem affordable.
Consumers should shop around
These circumstances make it more important for consumers seeking to finance a used car to shop around for the best terms. Some new players, including fintech firms, can be very competitive with banks and credit unions.
Scottie, of Danville, Va., told us he had a good experience with LoanMart, citing its flexibility.
“Unlike a regular car loan, you can pay towards the principal and get it down quicker than the months they had it set up for,” Scottie wrote in a ConsumerAffairs post.
‘Average loan size will continue to increase’
According to the CFPB, the danger for consumers is overextending the length of a loan. For example, financing a vehicle for six or seven years will result in a much slower payoff of the amount owed. At some point, the consumer will still owe more than the vehicle is worth – even in today’s hyperinflationary market.
“As a result, we expect that both the total amount of debt and the average loan size will continue to increase and that larger car loans will put increased pressure on some consumers’ budgets for much of the next decade,” the agency said.
Officials note that auto loans are already the third-largest consumer credit market in the U.S. at over $1.4 trillion outstanding. That's double the amount from 10 years ago, and it's expected to grow further. The CFPB has expressed concern that the inflated prices of used cars and trucks could create incentives for lenders to repossess cars more quickly than they would have in the past.
The financial regulating agency said it will closely monitor lender practices to measure how they affect consumers. In particular, it will evaluate lending structures where lenders appear to rely on high interest rates and fees to profit, even when consumers fail.