July 7, 2007

Racial inequality in auto loan interest rates

You may think that the interest rate of your auto loan depends only on your credit rating, but your race may also play a part. According to recent (2007) analysis by the Consumer Federation of America (CFA) of the Federal Reserve Board’s Survey of Consumer Finances data for 2004, black car buyers pay a much higher interest rate than white car buyers*. For new cars, the median rate for black buyers was 7%; whereas, it was 5% for whites and 5.5% for Hispanics. This racial gap increased from 2001, when the difference in rates between black and white borrowers was 1.3%. The analysis also found that 27% of new car loans taken out by blacks had interest rates of 15% or higher.

The discrepancy in interest rates is likely a result of a combination of several factors. The National Automobile Dealers Association claims that the factors that have the greatest impact on the interest rate a purchaser receives are the individual’s credit history, credit rating, and the prevailing interest rate at the time of purchase. Stephen Brobeck, the executive director of the CFA said that these results likely indicate that there is possibly different treatment based on race (i.e. discrimination).

Regardless of your race, it is always a good idea to shop around for loan rates when you go to buy a car. Frequently, the rates a dealer may offer you are much higher than you could obtain at other lending intuitions, especially if your credit is less than pristine.

In addition to shopping around for competitive loan rates, it is also important to research on your car to see if it is likely to be a lemon.


CFA utilized the services of Professor Catherine Montalto, a professor at The Ohio State University to analyze the latest Survey of Consumer Finances data, which was collected in 2004 and released last year. These data are for a representative sample of about 3,000 American households.