About That CFPB Report on Subprime Auto Loans
Yesterday, the Consumer Financial Protection Bureau released a report entitled, Data Point: Subprime Auto Loan Outcomes by Lender Type. The report compares the interest rates on subprime auto loans made by small and large Buy Here Pay Here (BHPH) companies, small and large finance companies, banks, and credit unions. Unsurprisingly, the report data shows that interest rates and default rates vary significantly across lenders of different types, and among consumers.
The report mentions that interest rates may vary across lender type for reasons besides default risk, such as: the price of the vehicle, the borrowers’ bargaining power and financial sophistication, lenders’ losses from delinquency, underwriting ability, willingness and ability to extract revenue from borrowers; and (for indirect loans) dealers’ willingness and ability to “mark up interest rates over and above what the lender is willing to offer.” (p. 28)
The report finds that differences in default rates could explain some of the differences in interest rates across lender types but cannot explain all the average differences. The report claims that the differences in interest rates are “quantitatively large,” and that if a borrower went to a bank instead of a small BHPH dealer, she could save roughly $894 over the life of the loan. Similarly, the report states, if a borrower went to a large finance company instead of a small one, she could save $1,348 over the life of the loan.
The researchers acknowledge that the data they drew upon is limited and more research is needed for a better understanding of the market. But the report overlooks the role consumers play in the marketplace, and how consumers interact with vehicle dealers and financial institutions.
For example, many consumers seeking to buy a vehicle from a dealer will typically receive multiple loan offers when they purchase an auto. Others will less than stellar credit, may not be pre-approved or qualify for a loan from a large bank and will have to seek financing from other options. In many of these cases, it is the financial standing of the consumer (and other factors, such as the type of vehicle, whether its new or used, etc.) that informs the type of lending options they are able to choose from.
AFSA, as well as other trades that are part of the vehicle finance industry, have pulled together educational resources for consumers to better understand the vehicle-finance process and their options. Visit Auto Financing 101 for information.
October 4th, 2021 by Dan Bucherer