Whether it's a sports car, you're excited to rev up for a
nice weekend drive, or a safe minivan filled with
entertainment features for your children. Cars are everywhere.
They are more than 275 million vehicles on the road in the
United States.
People they equate cars with freedom. There is this way in
which it gives us an ability to explore and see and expand our
lives. But in
recent years, owning a car has gotten expensive, really
expensive. More than 100 million Americans have an auto loan, and
auto loan debt in the U.S. is currently at $1.5 trillion
dollars - a record high.
Outside of purchasing your first home a new car or an auto is a
second largest purchase for most people. Given the transaction
prices and vehicle prices today financing is required to buy
these vehicles
In 2023 the average monthly auto loan payment for a new vehicle
is $725 up from $650.20 in 2022. The average monthly payment for
a used vehicle is $516 in 2023, up 2% from the prior year.
Meanwhile, consumers don't typically cast their car buying
experience in a positive light.
It was a very quick process. And I did feel like they just wanted
me to sign at the bottom line as quickly as possible.
For years complaints and lawsuits have been popping up
left and right against lenders for alleged discriminatory and
illegal practices.
It undermines my trust, our number one priority is to our
consumers. And so we have put a variety of processes in place to
ensure that is the case. So
what's happening in the auto loan industry and what can
consumers do to make sure they're protected?
Just like any other loan, an auto loan is a lump sum of money
you're given to purchase a car money you're borrowing and have
to pay back over time. Once you've been approved for a loan,
often including a down payment. You can drive your newer used
car out of the lot, but it's only yours as long as you make
monthly payments. With interest of course. Take 32 year old Sean
Miller for example. In 2019, he bought a new car for just more
than $48,000. He put down about $10,000 locked in a 3.89%
interest rate for a 72-month term, and now makes monthly
payments of about $590. By the time the loan is paid off, he'll
have paid nearly $5,000 in interest. And then there's a
caveat - until you fully pay back the loan the lender holds
the title and can repossess the car at any time if you fall
behind on your payments.
She was at work when her husband called to say their 2011
accurate had been stolen right in front of their East Orange
apartment building with their one year old daughter Hannah in
the backseat. Just got back to working a little behind my
payments.
Repo guys going into your driveway the middle of the night
and taking your car. That's one way they have these switches
that can turn the cars off.
There are direct and indirect lenders. A direct lender would
be your local bank, credit union or an online lender. Once you're
approved for a loan through a direct lender, you can then head
to the dealership and shop around for your car just like a
cash buyer would ask for indirect. That's when you go to
a dealer and they provide you with financing options as you're
buying a car. For example, you might be at a Subaru dealer and
you just picked out the perfect car for your family. The dealer
sends your financial information to chase Chase checks or credit
and other financial factors and provides the dealer with an
interest rate and loan terms. Then the dealer presents you
with their interest rate and terms and if you agree, you sign
and get to drive away with your new car. It's more of an all in
one process and about 80% of auto loans are estimated to be
indirect. Now regardless of if you're choosing a new or used
car or direct or indirect lending, one of the most
important factors that will determine the interest rate and
loan terms you're offered is how confident the lender is in your
ability to pay back that loan. They look at your assets,
liabilities, income, expenses, and most importantly, your
credit score.
Our primary goal is to put customers in financial products
that they can afford.
Chase Auto tells us they service consumers with a credit score of
620 and higher with the average credit score typically in the
700 range. Toyota Financial Services holds primarily a prime
credit portfolio, meaning they service those with very high
credit scores. They tell us the average is 744.
But we do support a larger spread of business and those
with maybe lower FICO score may come to the table with larger
payments to help that affordability.
Toyota is currently the market leader for auto loans and leases
in 2022. 5.3% of total auto financing came from Toyota
Financial Services 4.4% came from Capital One Auto Finance.
The partnership that we have with the divisions is what makes
us extremely successful. We've got to concentrate ration and a
focus on customers and our guests and our dealership
partners.
According to Toyota, the company's financial services
business consists primarily of providing financing to their own
dealers and their customers. The business also provides mainly
retail installment credit and leasing. Sales revenue for the
financial services business for fiscal year ending in March
2023, increased by nearly 21% To 2809.6 billion yen from 2022,
which is about $19.8 billion. That's compared to it's much
larger automotive operations business that saw an 18%
increase in sales revenue in 2023 from the year prior. The
Japanese automaker is the largest in the world.
The industry is going strong. We're continuing to recover
consumers are out there buying vehicles the demand is there and
the lending is there.
These firms are going to go out of business and these
people the chip shortage is still hampering the corporate
rate of inflation is soaring to its highest level in over 30
years.
More than half of auto financing is by non bank finance companies
such as the financing arms of automakers. These lenders
typically rely on short term funding markets for their own
financing. So with volatile markets, especially the case of
short term funding markets drying up during the global
financial crisis, the past couple of decades have kept auto
lenders on their toes, to say the least.
We went from a time of easy credit to now a time where we're
more credit constrained. And because of the risk of inflation
even more credit constrained, right, because of the interest
rates that have gone way up that is a huge problem.
In the first quarter of 2023 the average interest rate for a loan
on a new vehicle reached 6.58%, up from 4.1% in 2022. That's an
about 15 year high. Average car prices are also at a high.
That's partly due to supply chain shortages, higher demand
and inflation. That also means Americans take on larger loans
at a higher interest rate. In the past 10 years outstanding
loan debt has doubled. And auto loan debt in the U.S. is at a
record high. Younger Americans are also more in trouble than
they've ever been in. In 2020 to $20 billion and Gen Z and
Millennial debt had fallen into serious delinquencies.
I'm paying a ton of money right now for a car that I don't
really need. I've been struggling and struggling to
sell it. If I were to sell it today, it would probably be a 10
to $15,000 loss.
Miller rented his car out until someone crashed it. He's tried
to sell it but hasn't received an offer that makes financial
sense.
it's going to be at least another three or four years of
owning the car before I'm able to pay off the loan. This is
something that right now is preventing me from being able to
save up in order to start a family.
He's not alone with his concerns, and these changes are
hitting lower income consumers those with credit scores below
620 the hardest. The Fed's interest rate hikes are
squeezing them out of the market.
What we're seeing is another manifestation of what we saw
during the subprime crisis, which is that lower income
people lost their homes and lower income people are having
difficulty getting cars getting mortgages, and they're also at
higher risk of default.
Being priced out of the market is just one reason Americans
have a bone to pick with the auto loan industry. Besides the
notoriously unpleasant car buying experience there's also
been more complaints and lawsuits related to alleged
discriminatory and illegal practices by auto lenders, then
we have time to get into
A lot of the auto salespeople that I've seen personally, not
to say all but definitely a lot of them are doing it very much
in a rush way in order to get a high markup on a car in order to
get a great commission, but not with the interests of the buyer
not with their financial livelihood and with their family
in mind.
Remember that indirect lending example I gave you earlier with
Subaru and Chase? The bank or in that example, Chase provides an
interest rate and loan terms and then the dealer or Subaru
presents you with their interest rate in terms that's often with
the markup.
The consumer never sees how much the finance company has said is
the minimum interest rate and loan term that they will accept.
Let's say for example, Toyota Finance says that they want the
minimum interest rate to be 7%. The dealer can bump it up to 9%.
And the consumer never knows about that transaction. It
violates all of our norms about fairness and about the way
markets work.
It's a convenience the dealer is providing offering a service by
arranging financing that markup becomes profit for the dealer
and is sometimes shared with the lender
Chase and many financial institutions do put limits on
how much of a premium a dealer can have adds to the rate that
we offer. Putting limits ensures consistency of experience across
a variety of distributors.
Chase Auto did not provide us with what its current caps are.
Caps on markups vary based on state and lender but are
typically around 2.5 percentage points. Lack of transparency is
just one, but a common reasons some consumers feel they're
being treated unfairly. One of the more recent controversies
was this one, the Massachusetts Attorney General reached a $7.6
million settlement with Toyota Motor Corporation to resolve
allegations of illegal auto loan collection practices. The
lawsuit claims Toyota failed to give certain consumers
sufficient information about the calculation methods for
deficiencies left on their auto loans after their cars were
repossessed.
I can't comment on that settlement. We stand firmly
that, you know, our practices are very fair, you know, to
these specific settlements and fines I really can't comment
because of the specificity of the state allegations and what
might be behind it.
Back in 2016, a different settlement - that time for $21.9
million to settle allegations that Toyota discriminated
against Black and Asian borrowers by charging them
higher rates than white borrowers.
And Toyota is not alone. I think probably all the major car
manufacturers have been hit with lawsuits like this because of
the discretionary decision making when it comes to the
markups.
Toyota wouldn't comment on that settlement either. Or this
report spanning the entire industry by a former senior
economist at the Federal Reserve Bank of Chicago. It claims
Black, Hispanic and Asian borrowers often pay hundreds and
sometimes 1000s of extra dollars in loan payments relative to
their white counterparts. Do you have any insight into why that
might be?
No that is something I cannot comment on all of our risk.
based pricing is based off of FICO score and credit worthiness
of the customer. We don't even collect that type of data.
That report is not nearly the only one with such claims.
According to this 2022 research paper minority borrowers pay 70
basis point higher interest rates, but default less than non
minorities. These researchers say each year more than 80,000
minorities are unable to get loans that they would have been
approved for if they were white.
When ever people have subjective decision making. That's where
the lack of transparency is very problematic. We
spend a lot of time making sure that we understand and providing
affordable lending products to all consumers regardless of
their background. A class
action lawsuit was filed in 2017 alleging Chase Auto violated the
Fair Debt Collection Practices Act and state law by illegally
repossessing consumers vehicles from April 2013 to 2018. In
2018, Chase auto its parent company JP Morgan Chase, and
debt collector repossessor is incorporated agreed to pay $3.25
million to settle the case. What does Chase auto done since then,
and have business operations changed to prevent future
allegations? We
undergo a variety of tests of our systems and processes to
ensure that they are compliant with all rules and regulations.
And they've been a series of exams and reviews or prizes, and
we feel confident that we are complying with applicable law
and regulations.
For the first time in more than a decade in 2022 the FTC
proposed a rule addressing unfair and deceptive financing
practices by auto dealers. Their proposed measures include
banning bait and switch claims fraudulent junk fees, surprise
junk fees, and requiring full upfront disclosure of costs and
conditions.
I've dealt with predatory lending. Multiple members of my
family have also dealt with predatory lending in some very
sketchy situations. And it's really in our best interest to
have some rules in place to make sure that you know these
unscrupulous auto lenders aren't taking advantage of people.
But in July 2023, the US House Appropriations Committee back to
government spending bill containing language that blocks
the FTC from implementing its proposed new rules. So what does
that mean for consumers? It means new legislation is
probably not around the corner. In the meantime, consumer
advocates say more programs are needed to protect Americans
buying cars, and that increasing transparency is key.
My mother always knew how much bananas cost at every grocery
store and went to the store that has the cheapest price when it
comes to cars. We don't have that ability.
Do you believe a consumer should be able to see the rate directly
from Chase regardless of whether or not they're, you know,
getting pre approved at home prior to going to the dealership
or if they're sitting in the dealership and that's the first
time that they're trying to get an auto loan?
Yes, I think that transparency is critical. And so, if a
consumer goes to chase.com, they can see the rate they can see
the terms and they should be able to see the rates and
determine The dealership or whatever they get their
financial loan from.
Until we see changes in the industry, Americans need to look
out for themselves. Before getting an Auto Loan Experts
recommend shopping around, check your credit score, get pre
approved online, go to your local credit union and bank and
find out what types of deals you might be able to get before
signing anything.
Right now we're finding that the lowest interest rates are with
the credit unions average rates within credit unions are closer
to the 6% range, whereas the banks are closer to seven and
8%.
We now have digital marketplaces online. There's a wide range of
resources now that are available to help customers understand the
competitiveness of the interest rates, the terms that they're
getting arm yourself with the best information possible.
In 2020, Toyota launched smartpath, a digital retail tool
that lets customers shop for cars and apply for financing
online.
This concept of living room to show rose so that when customers
and guests are online, researching what kind of vehicle
they want, they can have a similar and transparent process.
If you have the means drive to a second, third, or maybe fourth
dealer to compare rates and terms and stay away from Buy
Here Pay Here dealers, they typically offered the highest
interest rates sometimes up to 20%. Do your research, ask
questions and don't give up. Even if it's been a long,
exhausting and mentally draining day. We all know the feeling of
not wanting to see one more number but don't let that push
you to sign on the dotted line. If you're not ready, tell the
dealer you need more time and you'll come back. Finally, vote.
There are tremendous problems and tremendous solutions. And
those solutions are only going to happen if the politicians who
are making decisions about federal law in particular are
willing to take consumers into account until we can get
politicians to commit to protecting consumers we're not
going to have solutions.