BALTIMORE — Alexandra Moore has been drowning in auto loan debt for the last eight years.
In 2015, she purchased a 2016 Hyundai Elantra valued at around $19,000. After making monthly payments of $570, she’s paid around $40,000, but still owes thousands of dollars on the loan.
“At the time, I worked in Anne Arundel County, so I really needed a car,” said Moore.
And she only agreed to the contract because she felt like she didn't have other options.
“Unfortunately, too many loans right now are designed to fail,” said Chuck Bell, programs director of advocacy at Consumer Reports, a nonprofit consumer advocacy organization that spent a year investigating car financing by analyzing around 850,000 loans. During that investigation, they found that 46 percent of the loans they reviewed were underwater and borrowers owed on average $3,700 more than what the vehicle was worth.
“I think a lot of consumers have no idea how expensive the loan is when they walk out of the dealership because they really are just focused on the monthly payments that's what the dealer encourages them to focus on,” said Bell.
“I just took the advice of the salesperson who advised me that it's okay if the payment is a little high because you'll be able to refinance in six months to a year,” said Moore.
Moore’s loan with Regional Acceptance Corporation was supposed to mature in 2021, but she fell behind on her payments and wasn't able to refinance.
“I found out I was upside down on the loan from the very beginning and no one would touch it,” said Moore.
According to Experian's latest State of the Automotive Finance Market report, interest rates through finance companies averaged 9.38 percent. However, the interest rate on Moore's loan is 18 percent.
Consumer Reports found that many borrowers are getting high interest rates that do not track with their creditworthiness.
And states have different limits on the rates lenders can charge. In Maryland, it's 24 percent. In New York, it’s 16 percent. Meanwhile, seven states have no auto loan interest rate limits.
“Just because something is legal does not make it right,” said Moore.
And borrowers who are upside down have limited ways out. They can refinance to lower interest rates, but they're getting into another long-term loan while the car's value keeps depreciating. Alternatively, they can try selling, but if it doesn't cover the amount they owe, they're left with a balance and no car. If they don't pay, the car is repossessed, they still owe the lender, and it may result in legal action.
Christina Pawlak with Consumer Credit Counseling Service of Maryland, a nonprofit counseling service, said the best option is to pay the excess balance as soon as possible, and they can help borrowers figure out how to do that.
“We can't work with a car payment, but we may be able to work with any credit cards that the client has. We may be able to help them reduce the monthly payment, reduce the interest rate, and that might give them extra money each month to make that higher car payment,” said Pawlak.
Pawlak and Bell are also encouraging drivers to talk with their bank or credit union before heading to the dealership. According to the Experian report, credit unions offer the lowest rates for new and used loans. The average credit union interest rate for new auto loans was 5.49 percent and 7.03 percent for used loans.
After you have an offer, shop around, and press the dealership for a better rate.
“We can ask for them and we can be more assertive in this process and we just have to understand that they don't have the same interests as we do,” added Bell.
“That salesperson is not the one who has to pay for it. They're going to go home and they're going to sleep good because they made a sale and you're going to be the one stuck,” said Moore.
WMAR-2 News Mallory Sofastaii contacted Truist about Moore's loan with Regional Acceptance Corporation. In an email, a spokesperson wrote:
“Due to privacy, we're unable to discuss any client relationships. However, we can confirm that we escalated this immediately with the appropriate teams and we have reached out to this individual directly in an effort to discuss this situation.”
Moore told Sofastaii they offered her a settlement that she couldn't afford. Her next steps are speaking with a credit counselor and warning others to avoid this debilitating debt.
Consumer Reports recommends putting down as much as you can afford. A good rule of thumb is 25 percent down with a 4-year loan and keeping all car-related expenses to 10 percent of your income or less.
Click here to use an auto loan calculator to figure out your monthly payment.
Consumer Reports also started a petition calling for tighter regulations on car loans. Click here to view it.
The American Financial Services Association (AFSA) issued a response to the Consumer Reports investigation. Below is a portion of their statement, click here to read AFSA's full response.
"The vast majority of consumers have many options for vehicle financing. Many get great deals in a competitive marketplace. Other consumers, with less than stellar credit, also have choices to ensure they can purchase the vehicle they need, with terms that they are confident they can meet. Of course, there are bad actors and unexpected circumstances, but AFSA and its member companies have consistently stood on the side of consumers, working to ensure they have access to the credit they need and that they are treated fairly, ethically and with respect."
