The Final Call

Car loans from dealers higher for Blacks

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“I’m a sales rep so I’m negotiating all day with clients.  I felt like I could get us a good interest rate and a good deal,” he told The Final Call.

But those skills didn’t work. With relatively good credit, they were still only offered a double digit interest rate. Feeling offended they got up and walked out.

“I felt really strange about the deal. I didn’t think we were getting the best offer we could.  Our credit was decent, we had a sizeable down payment and still they offered us a double digit interest,” said Kendra Simpson.

The Simpsons are not alone. A new report by the Center for Responsible Lending found that Blacks and Latinos pay higher interest rates on dealer-financed car loans than White buyers, even though people of color report more attempts to negotiate a better deal.

The report found that 39 percent of Latinos and 32 percent of Blacks reported attempts to negotiate their interest rate, compared to only 22 percent of White respondents—yet buyers of color continually received higher interest rates.

The report, “Non-Negotiable: Negotiation Doesn’t Help African Americans and Latinos on Dealer-Financed Car Loans,” is based on information collected from 946 consumers in a detailed telephone survey conducted in October 2012. The results are consistent with longstanding findings of racial and ethnic discrimination in the auto lending industry.

“As long as dealers can manipulate interest rates, car loans are a gamble for consumers,” said Chris Kukla, Center for Responsible Lending senior vice president. “Car buyers can do their best to negotiate, but they are at the mercy of dealers whose compensation is tied to hidden interest rate increases. That’s a formula for abuse.”

The three factors the study found that can add unnecessary costs to car loans by dealers are: Hidden dealer increases in the interest rate (markups), misleading sales information, and add-on products like insurance and warranties.

Car buyers of color were much more likely to report receiving misleading information about their car loans, and they were nearly twice as likely as White consumers to be sold multiple add-on products.

“Here’s what you have to remember when buying a car, you have to look at the integrity of the organization that is selling the car.  You have dealers and you have those say ‘buy here, pay here.’ They are notorious for robbing people,” experienced auto broker Jamil Muhammad told The Final Call. He currently works for a national auto corporation. “Some places will request a down payment and then a down payment for tags, title and taxes. White people only pay one down payment. Know what the existing interest rates are before you go. Blemished credit affects your interest rate. Whites operate from a household worth of nearly $100,000. Blacks generally operate from a household worth of less than $5,000. That makes a difference.”

The report discusses current dealer business practices and incentives that encourage discriminatory pricing on car loans, such as interest rate markups that car dealers than receive as compensation.

These markups are hidden; consumers typically have no idea that dealers can add to their compensation by increasing interest rates. In addition, dealers also increase consumer costs by selling add-on products, like extended warranties, rust proofing and paint protection programs.

“There is also financial redlining in some areas. They only offer the best interest rates to people who live in certain zip codes. Ask the financial officer about the interest rate they are offering and why yours is so high. Above all remember, the car business has lots of crooks in it. You have to watch them,” said Mr. Muhammad.

The survey found dealers sold Blacks and Latinos multiple add-ons 30 percent and 27 percent of the time, respectively, versus only 16 percent of the time for Whites.

The Simpsons have become more educated shoppers. They are not just looking for a new car anymore.

“We are looking for the dealer or even a credit union that can give us the best rate for our money and credit. Desire for a new car is no longer shopping, our educated minds are doing the shopping now. We know we can do better,” said Mr. Simpson.