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New study highlights the trouble with auto loans

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Angel Maldonado needed a car for his job. In order to afford it, he took out a loan. The payments cost him about one-third of his monthly income. The dealer, who had arranged Maldonado’s loan with the firm Exeter Finance, promised that he could refinance in 8 months to lower his payment. When he went to do just that, however, he found no such program actually existed at Exeter Finance. He wound up losing the job that sparked him to get the car, and ended up stuck with the debt.

Maldonado’s story was featured in a new investigation by Consumer Reports (CR) that finds many Americans facing a similar predicament. Americans are more in debt for their cars than ever before, and with chip shortages driving prices up in both the new and used car market, even more consumers are facing the decision of whether to go into unsustainable amounts of debt to purchase a vehicle.

CR’s investigation helps unearth one of the uniquely terrible things about the auto finance system we have today: the involvement of dealerships. Since cars are expensive, the vast majority of people who buy a car take out a loan to do it. And the vast majority, over 80%, of those borrowers let car dealerships arrange the financing on their behalf.

But car dealers are not compelled to act in the consumer’s best interests. In fact, with financing being one of the main ways dealers profit from car sales, there’s an incentive to charge consumers more for a loan.

When the dealer goes to arrange financing for you, they may get a number of loan offers on your behalf from a number of lenders, but never show you all the options, instead picking one that suits the dealership’s needs and often adding their markup on top of the interest payment. It’s a major reason why CR found that the annual percentage rate (APR) on loans seems to vary so widely (anywhere from 0% to a whopping 25%), and seems so disconnected from the typical variables you would expect to determine interest rates, like a consumer’s credit score or income level. The involvement of dealerships drives the surprising opaqueness of auto loans, and the wild amount of variability in how well consumers are treated, as I told Consumer Reports.

But while CR’s investigation shines light on what happens once consumers are in a showroom, there’s also a second, larger question at play: why consumers are in the showroom in the first place.

Consumer Reports found that about 1 in 4 of the car loans it examined were costing borrowers more than 10% of their monthly income, putting those folks’ long-term financial health at risk. Why would so many consumers choose to put themselves in such jeopardy?

It may be because, for many Americans, the choice of whether to buy a car is really no choice at all. We have built a society and a transportation system that has made ownership of a car a lifeline that gives Americans access to education, health services, social opportunities and employment.

That cars are so central to so many Americans’ lives is no accident. Decades of transportation and planning policy have led us down this road. Just look at what government spending has prioritized: between 1956 and 2014, 78% of all government capital expenditures on transportation went toward highway construction and maintenance, not modes like transit that are open and available to everyone without the upfront investment in a car. Or consider the way we’ve laid out our cities: zoning codes have put a lot of distance between where people work, shop and live, requiring many people to access a car just to be able to buy a quart of milk. Even our tax code incentivizes car ownership, with the federal income tax exclusion for people who drive and park their cars in order to get to work representing a $7.3 billion annual subsidy. By creating communities and transportation systems in which access to a car is the key to accessing many of life’s necessities, public policy has also created a reality in which the significant financial burden of car ownership is imposed on nearly everyone.

Making things better for people like Angel Moldonado and the hundreds of thousands of people whose car loans were examined by CR requires work on two fronts. There absolutely needs to be more government oversight and regulation of car dealerships to ensure that the financing they arrange for customers is transparent and fair. And there also needs to be a real change in our nation’s transportation priorities to make car ownership an actual choice, as opposed to an unwritten requirement for living a full life.

A less car-dependent world would be a better one in so many ways. It would be a world with cleaner air and less carbon pollution. A world with fewer traffic jams, quieter cities, and more adorable parks where there were once parking lots. A world where kids on bikes can explore their neighborhoods without fear and adults can start their morning free from road rage. A world where fewer of us will get the phone call that there’s been a wreck, and that someone we love didn’t walk away from it.

It would also be a world with fewer people drowning in life-altering debt. As Consumer Reports' investigation reminds us, that’s a world worth working for.