Get loan quote first, then shop for the car

It’s probably fair to say that most car buyers know they don’t have to pay the manufacturer’s suggested retail price on a new car.

We know the deal – the vehicle price is negotiable at dealerships where haggling is still the industry norm.

But for many borrowers, that same knowledge needs to carry over to the interest rate they pay to finance a vehicle. This is particularly true for African-Americans.

An analysis of the most recent Federal Reserve Board’s Survey of Consumer Finances data, completed on behalf of the Consumer Federation of America, found that in 2004, car buyers who were black paid much higher loan rates on new and used autos than whites.

On 2004 loans for new car purchases, blacks paid a median interest rate of 7 percent – compared with 5 percent for white borrowers and 5.5 percent for Hispanic borrowers. On used car loans, blacks and Hispanics both received considerably higher interest rates. The median rates for African-Americans and Hispanics were 9.5 and 9 percent respectively, compared with 7.5 percent for whites.

Additionally, CFA found that more blacks paid auto loan rates of at least 15 percent. For new car loans, 6 percent of black borrowers paid 15 percent or more, compared with just 1.7 percent for whites and 1.8 percent for Hispanics. On used car loans, 27 percent of black borrowers and 18.5 percent of Hispanic borrowers paid 15 percent or more, compared with only 9.2 percent of white borrowers, the analysis found.

For CFA, the findings suggest possible discrimination. “It is likely that most of the difference in rates reflects disparate treatment,” said Stephen Brobeck, CFA’s executive director.

An industry representative challenged CFA’s conclusion. The data do “not contain the necessary information regarding a host of variables that have direct and substantial impact on the rates, including, most notably, the borrower’s creditworthiness, and prevailing rates at the time the credit was issued,” said David Hyatt, vice president of public affairs for the National Automobile Dealers Association.

And yet expert research in 11 class-action lawsuits against major auto finance companies and banks found that blacks and Hispanics were consistently charged higher interest rates on their loans even when there was little difference in such factors as amount financed, term of loan and, most important, creditworthiness, said Stuart Rossman, director of litigation for the Boston-based National Consumer Law Center, which was a co-counsel in all the lawsuits.

The NCLC charged that the finance companies and banks put in place policies that allowed car dealers to mark up the interest rates on auto loans to minorities based on subjective criteria unrelated to their credit risk. All the cases have been settled – the most recent in March – without the lenders acknowledging any wrongdoing.

When a consumer asks the dealer to arrange financing, the loan is not made by the dealer. Instead, the dealer is only acting as a middleman, sending the consumer’s credit application to a lender, which may include a bank or finance company owned by the automobile manufacturer. Taking into account that person’s credit history and other information, a lender approves the finance application for a certain annual percentage rate known as the “buy rate.”

Generally, the consumer does not know their buy rate and doesn’t know the interest rate may have been marked up, Rossman said.

Let’s look at this in real dollars. Suppose the car you want to buy costs $28,000. The national average interest rate on a 48-month new car loan is 6.9 percent, according to bankrate.com. At that rate over the life of the auto loan, you would pay about $4,100 in interest. If the rate is kicked up to 15 percent, the total interest would be $9,400.

Dealers defend markups as legitimate compensation for helping to arrange loans.

But there is a difference between a fair profit and gouging. Certain borrowers should be charged a higher interest rate if their credit history and other factors indicate they’re a risk. But arbitrarily increasing a loan’s interest rate based on someone’s skin color, national origin and yes, even naivete, is despicable.

The CFA data are a picture of what was happening before the recent lawsuit settlements. Let’s see how things change once the terms of those settlements go into full effect. For example, consumers will have to be told in writing that their financing is negotiable. The settlements also impose markup caps that range from 1.5 to 2.5 percentage points depending on the length of the loan, Rossman said.

“We hope that the many lawsuit settlements will reduce the disparity significantly,” Brobeck said.

So how do you get the best financing deal?

“All consumers, not just African-Americans, need to protect themselves by getting an auto loan rate quote from their own bank or credit union before they go shopping for a car,” Brobeck said.

Notice he said before you set a foot onto the car lot or go online to shop for a car. If you don’t follow that advice, you’re likely to pay more for your auto loan than your risk profile suggests.

Washington Post Writers Group