Having a good credit rating requires discipline and diligence. The rewards of a high FICO score mean lower interest rates when applying for a credit card or purchasing a vehicle.
However, a recent Consumer Reports investigation revealed that consumers looking to purchase motor vehicles are being unnecessarily punished, if not overburdened by high-interest rates due to being put into subprime loans. While they have respectable credit scores, they potentially end up paying more than they can afford.
Overcharged and underwater
The problem is pervasive when considering that the average monthly payment for a new car loan is close to $600, an increase of 25 percent ten years ago. Those numbers have resulted in approximately eight million US residents with car leases or loans late on their car payments for more than 90 days.
While a majority of borrowers have consistently made on-time payments, that trend has changed in the last few years as longer-term loans have increased interest rates, some up to 25 percent. However, looking at consumers with comparable credit ratings reveal a wide range of interests rates.
Dealers and lenders are going beyond establishing interest rates because of the standard risks associated with credit scores. That has resulted in padding interest rates without consumers being aware of the practice.
Car loan debt has skyrocketed to more than $1.4 trillion over the past decade. The ballooning of value for new and used cars has the potential for debt to grow to astronomical levels. The numbers are not surprising due to loans starting with negative equity before the first payment. Nearly half are underwater, with consumers owing more on the car than the vehicle’s worth.
Exploiting pandemic-driven trends that have impacted the price of cars plays into the stereotype of the slick car salesman willing to make a deal at any cost. Consumers are already dealing with an inflation-driven environment that has increased the cost of food, gas, and other essentials. The underhanded practices of car sales reps only make a bad situation worse.