Discrimination in the Auto Loan Market

Abstract

We provide evidence of discrimination in the auto loan market. Combining credit bureau records with borrower characteristics, we find that Black and Hispanic applicants’ loan approval rates are 1.5 percentage points lower than White applicants’, even controlling for creditworthiness. In aggregate, this discrimination leads to over 80,000 minorities failing to secure loans each year. Results are stronger in more racially biased states and where banking competition is lower. Minorities who receive loans pay interest rates 70 basis points higher than comparable White borrowers. Ceteris paribus, minority borrowers have lower ex post default rates, consistent with preference-based racial discrimination. An anti-discrimination enforcement policy initiated in 2013, but halted in 2018, was effective in reducing unexplained racial disparities in interest rates by nearly 60%.

Keywords: Discrimination, Race, Auto Lending, Household Finance, Household Debt, Credit Access

JEL Classification: D12, D14, D18, D60, G21, G28, J15