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Americans have $1.42 trillion in auto loan debt and industry is off the rails, report says

Lenders don't have concrete guidelines when approving auto loans. Even customers with excellent credit may end up with high rates and costs.

Car loan stock image
Auto loans are in a really wild place right now.
Jayk7/Getty Images

It's no secret that the price of new and used cars climbed exponentially in the past decade, especially in the last year and a half. As vehicles get more expensive, there's a perfect storm: Buyers need to borrow money and lenders are ready to charge for that money. According to a report from Consumer Reports last Wednesday, the auto loan industry resembles the Wild West more than we thought.

Here's how it boils down. Lenders don't really have any hard rules in place when it comes to awarding rates to customers, regardless of their credit scores. CR examined nearly 858,000 auto loans from 17 lenders over one year. It found that subprime, prime or super-prime borrowers all had a high chance of sliding into a costly auto loan. In every credit score range, borrowers received APR loan rates from as low as 0% to beyond 25%. CR found that about 3% of borrowers with super-prime credit scores still wound up with auto loans attached to a 10% interest rate or greater. The data showed that many of these customers weren't aware they could negotiate loan terms with a lender before signing, or even shop around for a better rate.

Nearly 25% of the loans CR reviewed included consumers spending over 10% of their income on a car payment -- considered by experts to be a budget no-no. As for subprime borrowers, 50% of these consumers spent 10% of their income on an auto loan. Part of this may be due to a lack of underwriting standards, CR said. It found that only 4% of the time did lenders verify a customer's income and ensure ability to repay an auto loan. Just 4%

Last year Americans held $1.37 trillion worth of auto loan debt. CR estimates that debt will climb to $1.42 trillion this year. The average new car payment associated with this data is $600 per month, up 25% from 10 years ago. And these figures likely won't get any better, either, as a supply crunch for both new and used car inventory makes buyers more eager to step into anything with four wheels. All the while, dealers and lenders may continue to benefit.

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