It's the rare car buyer who walks out of a dealership convinced they got the absolute best deal on their purchase.
CRL researchers have closely scrutinized dubious car lending practices – using data derived from industry sources and results from a consumer survey – so that buyers might be better informed and get a fairer shake. "Car Trouble: Predatory Auto Loans Burden North Carolina Consumers," is CRL's first ever research report on this topic, and its findings are concerning.
We found that total kickback volume in North Carolina for new and used autos bought in 2007 totals a massive $665 million. "Kickbacks," another term for dealer markups, occur when lender agrees with dealer that the dealer may increase the buyer's interest rate. The kickback is financed by the excess interest the buyer pays over the life of the loan, and the extra profit is either split between lender and buyer or pocketed entirely by the dealer. For car buyers in North Carolina, this results in an average dealer markup of $642 per car, and total kickback volume of $665 million annually.
A consumer survey of more than a thousand adults enabled CRL to gain further perspective on auto lending and confirmed the pervasiveness of "yo-yo" scams in the marketplace. "Yo-yo" scams occur when the buyer is convinced they've sealed the deal and drive the vehicle home, only to discover they were placed in a conditional sale agreement later. The transaction becomes a "yo-yo" when the buyer is called back in to the dealership, and is told that the sale cannot be made as agreed. At that point, the buyer is required to pay the loan balance in full and return the car, or rework financing at more expensive terms.
The survey found that a quarter of low-income survey respondents have experienced "yo-yos." This obscure practice leads to a 5 percentage point higher interest rate on average for borrowers who can least afford it.
It is common practice that some salespeople will convince car buyers that purchasing add-ons such as vehicle service contracts (VSCs) and extended warranties, theft deterrent packages, and credit life and disability insurance is mandatory for the loan to be processed. CRL found that "loan packing" of add-on products disproportionately impacts African Americans and low-income buyers.
POLICY RECOMMENDATIONS
CRL supports legislation in the North Carolina General Assembly, HB 1223, which does the following to protect North Carolina consumers:
- Bans Dealer Kickbacks: Ban the back-end compensation dealers receive for selling more costly loans to consumers.
- Prohibits "Yo-Yo" Scams: Prohibit yo-yo scams and ensure more meaningful enforcement to prevent them.
- Addresses "Loan Packing": Provide a consistent and transparent means of presenting the cost of the vehicle, all fees, and add-on product sales.