Whether it's a sports car,
you're excited to rev up for a nice weekend drive, or a safe
minivan filled with entertainment features for your
children. Cars are everywhere. They are more than 275 million
vehicles on the road in the United States. People they equate cars with
freedom. There is this way in which it gives us an ability to
explore and see and expand our lives. But in recent years, owning a car has
gotten expensive, really expensive. More than 100 million
Americans have an auto loan, and auto loan debt in the U.S. is
currently at $1.5 trillion dollars - a record high. Outside of purchasing your first
home a new car or an auto is a second largest purchase for most
people. Given the transaction prices and vehicle prices today
financing is required to buy these vehicles In 2023 the average monthly auto
loan payment for a new vehicle is $725 up from $650.20 in 2022.
The average monthly payment for a used vehicle is $516 in 2023,
up 2% from the prior year. Meanwhile, consumers don't
typically cast their car buying experience in a positive light. It was a very quick process. And
I did feel like they just wanted me to sign at the bottom line as
quickly as possible. For years complaints and
lawsuits have been popping up left and right against lenders
for alleged discriminatory and illegal practices. It undermines my trust, our
number one priority is to our consumers. And so we have put a
variety of processes in place to ensure that is the case. So what's happening in the auto
loan industry and what can consumers do to make sure
they're protected? Just like any other loan, an
auto loan is a lump sum of money you're given to purchase a car
money you're borrowing and have to pay back over time. Once
you've been approved for a loan, often including a down payment.
You can drive your newer used car out of the lot, but it's
only yours as long as you make monthly payments. With interest
of course. Take 32 year old Sean Miller for example. In 2019, he
bought a new car for just more than $48,000. He put down about
$10,000 locked in a 3.89% interest rate for a 72-month
term, and now makes monthly payments of about $590. By the
time the loan is paid off, he'll have paid nearly $5,000 in
interest. And then there's a caveat - until you fully pay
back the loan the lender holds the title and can repossess the
car at any time if you fall behind on your payments. She was at work when her husband
called to say their 2011 accurate had been stolen right
in front of their East Orange apartment building with their
one year old daughter Hannah in the backseat. Just got back to
working a little behind my payments. Repo guys going into your
driveway the middle of the night and taking your car. That's one
way they have these switches that can turn the cars off. There are direct and indirect
lenders. A direct lender would be your local bank, credit union
or an online lender. Once you're approved for a loan through a
direct lender, you can then head to the dealership and shop
around for your car just like a cash buyer would ask for
indirect. That's when you go to a dealer and they provide you
with financing options as you're buying a car. For example, you
might be at a Subaru dealer and you just picked out the perfect
car for your family. The dealer sends your financial information
to chase Chase checks or credit and other financial factors and
provides the dealer with an interest rate and loan terms.
Then the dealer presents you with their interest rate and
terms and if you agree, you sign and get to drive away with your
new car. It's more of an all in one process and about 80% of
auto loans are estimated to be indirect. Now regardless of if
you're choosing a new or used car or direct or indirect
lending, one of the most important factors that will
determine the interest rate and loan terms you're offered is how
confident the lender is in your ability to pay back that loan.
They look at your assets, liabilities, income, expenses,
and most importantly, your credit score. Our primary goal is to put
customers in financial products that they can afford. Chase Auto tells us they service
consumers with a credit score of 620 and higher with the average
credit score typically in the 700 range. Toyota Financial
Services holds primarily a prime credit portfolio, meaning they
service those with very high credit scores. They tell us the
average is 744. But we do support a larger
spread of business and those with maybe lower FICO score may
come to the table with larger payments to help that
affordability. Toyota is currently the market
leader for auto loans and leases in 2022. 5.3% of total auto
financing came from Toyota Financial Services 4.4% came
from Capital One Auto Finance. The partnership that we have
with the divisions is what makes us extremely successful. We've
got to concentrate ration and a focus on customers and our
guests and our dealership partners. According to Toyota, the
company's financial services business consists primarily of
providing financing to their own dealers and their customers. The
business also provides mainly retail installment credit and
leasing. Sales revenue for the financial services business for
fiscal year ending in March 2023, increased by nearly 21% To
2809.6 billion yen from 2022, which is about $19.8 billion.
That's compared to it's much larger automotive operations
business that saw an 18% increase in sales revenue in
2023 from the year prior. The Japanese automaker is the
largest in the world. The industry is going strong.
We're continuing to recover consumers are out there buying
vehicles the demand is there and the lending is there. These firms are going to go out
of business and these people the chip shortage is
still hampering the corporate rate of inflation is soaring to
its highest level in over 30 years. More than half of auto financing
is by non bank finance companies such as the financing arms of
automakers. These lenders typically rely on short term
funding markets for their own financing. So with volatile
markets, especially the case of short term funding markets
drying up during the global financial crisis, the past
couple of decades have kept auto lenders on their toes, to say
the least. We went from a time of easy
credit to now a time where we're more credit constrained. And
because of the risk of inflation even more credit constrained,
right, because of the interest rates that have gone way up that
is a huge problem. In the first quarter of 2023 the
average interest rate for a loan on a new vehicle reached 6.58%,
up from 4.1% in 2022. That's an about 15 year high. Average car
prices are also at a high. That's partly due to supply
chain shortages, higher demand and inflation. That also means
Americans take on larger loans at a higher interest rate. In
the past 10 years outstanding loan debt has doubled. And auto
loan debt in the U.S. is at a record high. Younger Americans
are also more in trouble than they've ever been in. In 2020 to
$20 billion and Gen Z and Millennial debt had fallen into
serious delinquencies. I'm paying a ton of money right
now for a car that I don't really need. I've been
struggling and struggling to sell it. If I were to sell it
today, it would probably be a 10 to $15,000 loss. Miller rented his car out until
someone crashed it. He's tried to sell it but hasn't received
an offer that makes financial sense. it's going to be at least
another three or four years of owning the car before I'm able
to pay off the loan. This is something that right now is
preventing me from being able to save up in order to start a
family. He's not alone with his
concerns, and these changes are hitting lower income consumers
those with credit scores below 620 the hardest. The Fed's
interest rate hikes are squeezing them out of the
market. What we're seeing is another
manifestation of what we saw during the subprime crisis,
which is that lower income people lost their homes and
lower income people are having difficulty getting cars getting
mortgages, and they're also at higher risk of default. Being priced out of the market
is just one reason Americans have a bone to pick with the
auto loan industry. Besides the notoriously unpleasant car
buying experience there's also been more complaints and
lawsuits related to alleged discriminatory and illegal
practices by auto lenders, then we have time to get into A lot of the auto salespeople
that I've seen personally, not to say all but definitely a lot
of them are doing it very much in a rush way in order to get a
high markup on a car in order to get a great commission, but not
with the interests of the buyer not with their financial
livelihood and with their family in mind. Remember that indirect lending
example I gave you earlier with Subaru and Chase? The bank or in
that example, Chase provides an interest rate and loan terms and
then the dealer or Subaru presents you with their interest
rate in terms that's often with the markup. The consumer never sees how much
the finance company has said is the minimum interest rate and
loan term that they will accept. Let's say for example, Toyota
Finance says that they want the minimum interest rate to be 7%.
The dealer can bump it up to 9%. And the consumer never knows
about that transaction. It violates all of our norms about
fairness and about the way markets work. It's a convenience the dealer is
providing offering a service by arranging financing that markup
becomes profit for the dealer and is sometimes shared with the
lender Chase and many financial
institutions do put limits on how much of a premium a dealer
can have adds to the rate that we offer. Putting limits ensures
consistency of experience across a variety of distributors. Chase Auto did not provide us
with what its current caps are. Caps on markups vary based on
state and lender but are typically around 2.5 percentage
points. Lack of transparency is just one, but a common reasons
some consumers feel they're being treated unfairly. One of
the more recent controversies was this one, the Massachusetts
Attorney General reached a $7.6 million settlement with Toyota
Motor Corporation to resolve allegations of illegal auto loan
collection practices. The lawsuit claims Toyota failed to
give certain consumers sufficient information about the
calculation methods for deficiencies left on their auto
loans after their cars were repossessed. I can't comment on that
settlement. We stand firmly that, you know, our practices
are very fair, you know, to these specific settlements and
fines I really can't comment because of the specificity of
the state allegations and what might be behind it. Back in 2016, a different
settlement - that time for $21.9 million to settle allegations
that Toyota discriminated against Black and Asian
borrowers by charging them higher rates than white
borrowers. And Toyota is not alone. I think
probably all the major car manufacturers have been hit with
lawsuits like this because of the discretionary decision
making when it comes to the markups. Toyota wouldn't comment on that
settlement either. Or this report spanning the entire
industry by a former senior economist at the Federal Reserve
Bank of Chicago. It claims Black, Hispanic and Asian
borrowers often pay hundreds and sometimes 1000s of extra dollars
in loan payments relative to their white counterparts. Do you
have any insight into why that might be? No that is something I cannot
comment on all of our risk. based pricing is based off of
FICO score and credit worthiness of the customer. We don't even
collect that type of data. That report is not nearly the
only one with such claims. According to this 2022 research
paper minority borrowers pay 70 basis point higher interest
rates, but default less than non minorities. These researchers
say each year more than 80,000 minorities are unable to get
loans that they would have been approved for if they were white. When ever people have subjective
decision making. That's where the lack of transparency is very
problematic. We spend a lot of time making sure
that we understand and providing affordable lending products to
all consumers regardless of their background. A class action lawsuit was filed in 2017
alleging Chase Auto violated the Fair Debt Collection Practices
Act and state law by illegally repossessing consumers vehicles
from April 2013 to 2018. In 2018, Chase auto its parent
company JP Morgan Chase, and debt collector repossessor is
incorporated agreed to pay $3.25 million to settle the case. What
does Chase auto done since then, and have business operations
changed to prevent future allegations? We undergo a variety of tests of
our systems and processes to ensure that they are compliant
with all rules and regulations. And they've been a series of
exams and reviews or prizes, and we feel confident that we are
complying with applicable law and regulations. For the first time in more than
a decade in 2022 the FTC proposed a rule addressing
unfair and deceptive financing practices by auto dealers. Their
proposed measures include banning bait and switch claims
fraudulent junk fees, surprise junk fees, and requiring full
upfront disclosure of costs and conditions. I've dealt with predatory
lending. Multiple members of my family have also dealt with
predatory lending in some very sketchy situations. And it's
really in our best interest to have some rules in place to make
sure that you know these unscrupulous auto lenders aren't
taking advantage of people. But in July 2023, the US House
Appropriations Committee back to government spending bill
containing language that blocks the FTC from implementing its
proposed new rules. So what does that mean for consumers? It
means new legislation is probably not around the corner.
In the meantime, consumer advocates say more programs are
needed to protect Americans buying cars, and that increasing
transparency is key. My mother always knew how much
bananas cost at every grocery store and went to the store that
has the cheapest price when it comes to cars. We don't have
that ability. Do you believe a consumer should
be able to see the rate directly from Chase regardless of whether
or not they're, you know, getting pre approved at home
prior to going to the dealership or if they're sitting in the
dealership and that's the first time that they're trying to get
an auto loan? Yes, I think that transparency
is critical. And so, if a consumer goes to chase.com, they
can see the rate they can see the terms and they should be
able to see the rates and determine The dealership or
whatever they get their financial loan from. Until we see changes in the
industry, Americans need to look out for themselves. Before
getting an Auto Loan Experts recommend shopping around, check
your credit score, get pre approved online, go to your
local credit union and bank and find out what types of deals you
might be able to get before signing anything. Right now we're finding that the
lowest interest rates are with the credit unions average rates
within credit unions are closer to the 6% range, whereas the
banks are closer to seven and 8%. We now have digital marketplaces
online. There's a wide range of resources now that are available
to help customers understand the competitiveness of the interest
rates, the terms that they're getting arm yourself with the
best information possible. In 2020, Toyota launched
smartpath, a digital retail tool that lets customers shop for
cars and apply for financing online. This concept of living room to
show rose so that when customers and guests are online,
researching what kind of vehicle they want, they can have a
similar and transparent process. If you have the means drive to a
second, third, or maybe fourth dealer to compare rates and
terms and stay away from Buy Here Pay Here dealers, they
typically offered the highest interest rates sometimes up to
20%. Do your research, ask questions and don't give up.
Even if it's been a long, exhausting and mentally draining
day. We all know the feeling of not wanting to see one more
number but don't let that push you to sign on the dotted line.
If you're not ready, tell the dealer you need more time and
you'll come back. Finally, vote. There are tremendous problems
and tremendous solutions. And those solutions are only going
to happen if the politicians who are making decisions about
federal law in particular are willing to take consumers into
account until we can get politicians to commit to
protecting consumers we're not going to have solutions.
