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Car Loans as Pricey as the Car; Three Recent Lawsuits Allege that Minority Car Buyers are Routinely Charged More Interest than their White Counterparts
East Bay Express (California)
May 21, 2003
The three class-action suits, each hinging on the experiences of at least one East Bay plaintiff, target American Honda Finance Corporation, Toyota Motor Credit Corporation, and WFS Financial for discrimination in auto loans. The suits allege that minority borrowers typically pay between $500 and $1,000 more per loan than do white applicants of equal creditworthiness. This discrimination allegedly occurs as part of an eleventh-hour interest-rate "markup" imposed by the dealer with little or no relationship to the borrower's finances or credit history.
The dealer markup works this way: If a buyer isn't going to pay cash, or hasn't previously arranged an auto loan through his or her own bank, the dealership runs a credit check that is used to calculate the interest rate on the buyer's loan. This is based on a strict formula that takes into account the borrower's income, credit history, and other economic factors. The dealership then submits the customer's loan application to various finance companies, which, if he or she agrees to buy the loan, will specify the "buy rate," or the interest rate they intend to charge. But the finance company's offer is not necessarily the last word on the interest rate; the dealership is at liberty to mark up the interest rate however it chooses.
If customers aren't aware of local interest rates and what their credit rating should be, they can easily be led into accepting these markups and paying a higher rate than they should, says Philip Reed, consumer advice editor for Edmunds.com, a consumer education Web site for auto buyers. People with less-than-perfect credit make particularly easy targets because they expect to pay higher rates, and Reed says some dealerships try to take advantage of this situation.