Consumer Reports: Watch Out for Higher-Interest Loans at Used Car Lots

With used car prices still sky-high, Consumer Reports says to watch out for matching sky-high interest loans. How can consumers avoid getting trapped in one of these loans? Check out some of the information below from the Consumer Financial Protection Bureau and Consumer Reports to try and avoid getting caught in a bad loan.

Interest rates for used cars can be as high as 20%, Consumer Reports and the Consumer Financial Protection Bureau say

Consumer Reports says to watch out for high-interest loans at used car lots
Consumer Reports says to watch out for high-interest loans at used car lots | Justin Sullivan/Getty Images

Used car buyers with low credit scores can often find themselves in a sticky situation. Frequently, a “buy-here, pay-here” option can seem like a good deal for potential buyers. It comes off as a convenient way to get a vehicle and not have to apply for a conventional loan. However, Consumer Reports says a new government report details the dangers of this option.

A recent analysis from the Consumer Financial Protection Bureau says that the “auto loan market is the third-largest debt market in the United States.” Those looking to get a loan with a credit score of 620 or less got interest rates of 15% to 20%. The average rate at a bank is around 10%. The buyers with subprime scores are the most likely to need these types of loans and are the most likely to default on the loans.

The analysis shows that those likely to default by at least 60 days within three years are around 15% for bank borrowers. That is compared to approximately 25% to 40% for those utilizing the buy-here, pay-here model. Combined with spiking used car prices, buyers are set up to default at the start.

Consumer Reports says to watch out when used car shopping, and new car shopping

The Consumer Financial Protection Bureau discovered that the default rate could be connected to the fact that the interest rate is so much higher. The study showed that those with a credit score of at least 560 had the same default risk regardless of the place of the loan. The interest rate would be 13% at a buy-here, pay-here lot versus 9% at a bank. Over the loan’s lifetime, that would save $894 if the loaner reduced the interest rate from 13% to 9%.

There were many variations to the data that could impact this number. These are things like down payments, the value of the vehicle, lender practices, and the financial knowledge of the borrower. The CFPB stressed that the analysis only observed correlations in the situation and did not establish causality. Borrowers wouldn’t necessarily save money should the loan be taken out at a bank versus a dealership lot.

This is a common issue these days

Consumer Reports: Watch Out for Higher-Interest Loans at Used Car Lots
Total American loan debt | Consumer Reports via the Federal Reserve Bank of New York

Consumer Reports found recently that even buyers with good credit are being put into subprime loans and overpaying. By being trapped in a high-interest loan, even those with good credit are subject to defaulting because it becomes more than an average person can pay. An example offered was a loan for a 2018 Toyota Camry with a 19% loan and an $823 monthly payment. By 2025, the price of that Camry would have been at $59,000.

The average APR in November 2019 was around 4.5%, which still took about 15% of the borrower’s monthly income. In six months, the buyer was already delinquent on the bill. The loan isn’t the problem, but the interest gets out of hand, and buyers can no longer keep up.

American auto loan debt is at an all-time high, topping out at $1.4 trillion in 2021. “You’re not helping somebody to get a car if the odds are they’re going to lose it. That’s not getting somebody a car. That’s taking their money.” Kathleen Engel of Suffolk University Law School said.

Try to get a loan from a bank or credit union


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Since auto loans are not standardized, people often don’t know what kind of loan is available. Consumer Reports suggests trying to get a loan from a bank or a credit union, if possible. If buyers have to go through a car dealership, you can negotiate on the financial terms of the offer in addition to the price of the car. Buying a used car can be stressful, but being aware of these situations ahead of time is a good way to avoid getting caught in an impossible situation.