Explaining Racial Differences in Vehicle Loan Rates

During the last few years there have been many claims of differential treatment of minorities in the vehicle lending market- primarily among vehicle finance companies. In this paper, we use data from the Survey of Consumer Finances to analyze racial differences in interest rates paid on vehicle loans throughout the vehicle lending market. We show that the majority of both Blacks and Whites originate their loans on new vehicles at institutions other than vehicle finance companies (primarily commercial banks and credit unions). Among new car loans, we find no differential treatment of Black and White borrowers conditional on the borrower’s credit history for loans originated at banks and credit unions. Likewise, we find no differential treatment of Black and White borrowers among used car loans regardless of where the loan was originated. However, we find that Blacks pay higher interest rates on new car loans originated at vehicle finance companies, conditional on borrower credit characteristics. Specifically, we find that Blacks pay 100 basis points more for their vehicle loan at the mean and 71 basis points more at the median, conditional on credit controls, relative to Whites. These point estimates translate to Black borrowers at vehicle finance companies paying a premium in terms of higher financing of their new car purchases of between $5 and $7 per month. We conclude that that differential treatment in the terms of financing by race is much greater for loans originated at vehicle finance companies than for loans originated at banks or credit unions.