CFPB launches auto loan shopping guide

The Consumer Financial Protection Bureau (CFPB) has unveiled an “auto loan shopping sheet,” a step-by-step guide, and additional online resources as part of a new Know Before You Owe initiative aimed at helping consumers shop for an auto loan.

The move follows on from CFPB research about how consumers approach the auto financing decision, and the challenges they face in navigating the process. The study concludes that while consumers diligently research the type of vehicles they want to buy, they do not fully explore the available financing options. Additionally, examination of the CFPB complaint data shows consumers have difficulty understanding loan features during the loan negotiations.

The bureau says its shopping sheet is designed to help consumers see the total cost of a loan and make “apples-to-apples” comparisons among loan products. The Know Before You Owe auto loan initiative also walks consumers through each step of the auto finance process to help them decide how much they can afford to borrow and what options are right for them.

Automobile loans are the third largest category of household debt for American consumers, behind mortgages and student loans, with almost 100 million auto loans outstanding totaling more than $1 trillion. For consumers who do not purchase a home, an automobile loan may be the largest debt they will ever have to pay back. More than 90% of American households have a vehicle, and consumers obtain financing to purchase 86% of new vehicles and 55% of used vehicles.

“Consumers should feel like they are in the driver’s seat when it comes to financing their car or truck,” said CFPB Director Richard Cordray. “The CFPB’s auto loan shopping sheet provides a roadmap for consumers to navigate the complexities of a loan. Consumers should know before they owe when it comes to the total cost, not just the monthly payments.”

Lengthening terms

Typically, consumers have obtained auto loans with 60-month repayment plans, but the length of the loans, and indebtedness, are increasing. Meanwhile, the average length of ownership of a vehicle by US consumers is approximately eight years. This means the auto budgeting and financing process is being regularly repeated by many consumers, with consumers still owing on loans after they are no longer driving the vehicle.

The CFPB says that according to the National Financial Capability Survey, only 50% of consumers report comparison shopping for an auto loan. The shopping sheet makes clear the factors that a consumer can negotiate and compare between loan offers, including the price of the vehicle, down payment, interest rate, length of the loan, and trade-in value of their current vehicle.

The shopping sheet also shows how additional features, services, or add-ons can increase upfront costs. These optional add-ons to the loans include service contracts or extended warranties, “guaranteed auto protection” (GAP) insurance, and credit insurance.