Inequalities in Dealers' Interest Rate Markups? A Gender and Race-based Analysis

Abstract

Most car buyers are unaware that dealers can mark up interest rates for auto loans, the third most prevalent U.S. consumer debt category, beyond the rate dictated by lenders. Dealers can set their markups without considering buyer risk profiles, potentially leading to discrimination. Using individual transaction-level data from a 20% random sample of U.S. car dealers between 2004 and 2015, this paper shows that women and minorities pay a statistically significant 0.6% and 2.6% greater interest rate markup than men and non-minorities, respectively. The racial and gender gaps in dealer markups largely attenuate over time. Additionally, the premia for minorities and women are larger for those buyers in census block groups with lower education levels, those not trading in a car, and those in markets with fewer financial institutions. Although we find no heterogeneity in the racial gap by age and political inclination, the gender gap increases for women who are relatively older and is significant only in majority Republican-voting counties. Our analyses do not provide a precise estimate of the interaction effect between race and gender. Based on the buyer characteristics considered, the most vulnerable group of women (minorities), accounting for 4.7% (8.5%) of car buyers, pay 7.6% (27.9%) more compared to men (non-minorities). The findings inform policymakers and consumers of the gender and racial gaps in auto financing, their underlying mechanisms, and situations most susceptible to unfair lending.

Keywords: gender gap, racial gap, fair lending, price discrimination, equal credit opportunity act, auto loans

JEL Classification: M31