Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses

25 Pages Posted: 9 Jun 2011

See all articles by Delvin Davis

Delvin Davis

Southern Poverty Law Center

Joshua M. Frank

Center for Responsible Lending

Date Written: April 19, 2011

Abstract

Markups on auto loan interest rates are routinely used to compensate a dealership for the service of securing financing with a third party lender. However, rate markups add percentage points to the rate a consumer would legitimately qualify for, and are added without the adequate disclosure to the consumer. Such a dynamic creates a "reverse competition" environment where the dealer's service only increases the cost to consumers, never decreasing it. Our research analyzes automobile asset backed securities and data from multiple auto industry sources to examine the scope of auto rate markups and their impact on loan performance. We conclude that rate markups on auto loans lead to more expensive loans and higher odds for default and repossession for subprime consumers. As a result, the report recommends divorcing all dealer compensation from the manipulation of the interest rate.

Keywords: auto loan, interest rate, markups, delinquency, repossession

JEL Classification: D18

Suggested Citation

Davis, Delvin and Frank, Joshua Mayer, Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses (April 19, 2011). Available at SSRN: https://ssrn.com/abstract=1860188 or http://dx.doi.org/10.2139/ssrn.1860188

Delvin Davis (Contact Author)

Southern Poverty Law Center ( email )

Montgomery, AL
United States
5042207706 (Phone)

HOME PAGE: http://www.splcenter.org

Joshua Mayer Frank

Center for Responsible Lending ( email )

302 West Main St.
Durham, NC 27701
United States
9193138525 (Phone)
919-313-8592 (Fax)

HOME PAGE: http://www.responsiblelending.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
411
Abstract Views
2,400
Rank
153,371
PlumX Metrics