Driving into Debt: Subprime Car Loans Contribute to Broken American Dream

Inside Subprime: June 11, 2019

By Jessica Easto

Car ownership, once a symbol of freedom and as much a part of the American Dream as white picket fences, is increasingly becoming a burdensome obligation on many Americans.

The cost of car ownership has increased steadily while wages have not. Yet many Americans live in places without access to  public transportation, which often makes a reliable vehicle a prerequisite for finding and keeping employment. According to a new report called Driving into Debt, this precarious situation forces many American families into debt and makes them vulnerable to risky and predatory subprime car loans.

There are a mind-boggling 272 million privately owned vehicles in America today—that’s one car for every 1.2 people. Yet a recent report by the Federal Reserve Bank of New York found that 7 million Americans are more than 90 days delinquent on their car loans, a trend that has been increasing since 2012.

According to Driving into Debt, there were 113 million open car loans at the end of 2018. Eighty-five percent of new cars and 35 percent of used cars were purchased with loans. All together, overall car debt is up 75 percent since the Great Recession, and Americans owe a record-breaking $1.28 trillion on all those cars.

In other words, car ownership is expensive—it’s estimated that, on average, about one hour of each American’s workday is spent earning the money they need to get to work in the first place. And America is filled with so-called “transportation deserts” that all but require residents to have their own form of transportation. Areas with dense public transportation are not immune: only 15 percent of jobs in New York City are within an hour’s commute by public transit while 75 percent are within an hour’s drive.

The report argues that this dynamic leaves many Americans, especially low-income Americans, financially vulnerable. Subprime loans—loans that are extended to those with bad credit scores—for automobiles are on the rise. In 2016, these subprime auto loans accounted for as much as 26 percent of all auto loans.

This type of lending provides an option to people who do not qualify for traditional loans, but they come at a cost. Subprime loans often have high interest rates and fees and leave borrowers vulnerable to predatory practices. For example, subprime auto lenders have been known to offer loans with incomplete or confusing information, knowingly lend to people who do not have the means to repay, push expensive and unnecessary “add-on” products, and more.

The report argues for strengthened consumer protections so that people can get to work without navigating predatory and abusive loan practices. It calls for lawmakers to not only close loopholes and tighten regulations to reduce opportunity for predatory lenders and their unfair practices but also advocate for transportation policies that would reduce our extreme reliance on cars and car ownership.

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