The financial industry has been accused all throughout its history of discrimination. Sometimes those accusations are inaccurate, and other times, bias is revealed. So what should consumers make of the latest news in auto loans, where Honda has settled for $24 million with the Department of Justice over discrimination claims?
Discrimination In The System
The case in question was about interest rates. The Department of Justice filed a complaint that American Honda Finance Corp., Honda’s American auto financing business, was charging minority borrowers higher interest rates than white consumers, usually between one and two interest points more than a white borrower with a similar credit rating.
It’s especially a point of concern as American Honda didn’t issue any loans directly. Instead the dealer took an application and sent it to the company, and it was, in theory, supposed to make its decisions based entirely on the borrower’s creditworthiness. It appears, however, that this wasn’t the case.
Once the rates were analyzed, a pattern emerged, and Honda will pay $24 million in restitution to its customers. It will also accept a strict cap on the interest rate markups it can apply to any loan, cut from 2.25% to 1.25%. This will prevent the company from discriminating in the future, as it has to treat every borrower the same.
So what does this mean for consumers, regardless of their background? That they should look beyond auto manufacturers for the car loans they need.
Perhaps the most important financial lesson here, beyond the discrimination, is that it’s not only perfectly legal for dealerships to add markups to your car loan … they don’t have to disclose the total markup, or even that there’s a markup at all. That lack of transparency is what allowed discrimination against their customers to flourish in the first place. If consumers were better able to compare their loans, Honda likely never would have allowed that discrimination for fear of bad press.
However, adding extra interest to your loan without telling you is not only legal, as you might notice, but common. In other words, even if you’re not going to be discriminated against … you’re still not getting the best loan if you go through a dealership.
If you’re a consumer who worries about discrimination, or just wants the best deal, you should look beyond the dealership. The rapid growth in auto loans and car sales over the last few years have both broadened the scope of traditional auto loan lenders such as banks and credit unions, and brought alternative lenders seeking to build the community into the industry.
In other words, you have options. Lending networks have grown over the years that make finding quotes and comparing lenders easier than ever. Instead of going through just one lender at the dealership, and giving the dealership more control and money than you realize, you can and should secure financing before you even step on the lot. By getting your loan separately, you’ll both guarantee that you’re treated fairly, and ensure you get exactly the car you need.