CFPB Unveils New ‘Know Before You Owe’ Auto Loans Shopping Sheet
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Consumers are walked through each step of the auto finance process to help them decide how much they can afford and what loan options are right for them

June 13, 2016

The Consumer Financial Protection Bureau (CFPB) has unveiled a new auto loan shopping sheet, which offers a step-by-step guide along with additional online resources to help consumers shop for an auto loan.

The shopping sheet and accompanying resources are part of the CFPB's "Know Before You Owe" initiative—which is aimed at educating consumers about the costs and risks of financial products prior to signing on the dotted line. The CFPB has also launched Know Before You Owe initiatives on mortgages, student loans, and prepaid financial products.

The new auto loan shopping sheet allows consumers see the total cost of a loan, as well as make apples-to-apples comparisons among different auto loan products. Consumers are walked 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.

"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.

According to the CFPB, 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 percent of American households have a vehicle, and consumers obtain financing to purchase 86 percent of new vehicles and 55 percent of used vehicles.

Typically, the CFPB says that 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 U.S. consumers is approximately 8 years. This means that 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.

Direct Versus Indirect Lending

There are two primary methods of arranging financing for a vehicle purchase, often called "direct" and "indirect" lending. Direct lending is when consumers obtain financing from a bank, credit union, or other lender. The CFPB says that consumers using direct lending will usually get an interest rate quote or conditional commitment letter from the bank or credit union before going to the dealership to buy a vehicle.

With indirect lending, also called dealer-arranged financing, consumers obtain lender financing through the auto dealership where they purchase the vehicle. The dealership usually collects information from the consumer and forwards that information to auto lenders. After the deal is finalized with the consumer, the loan may then be sold to the lender, which has already indicated its willingness to extend credit to the applicant on established terms. According to the CFPB, indirect financing constitutes the majority of auto finance transactions.

The CFPB says that independent research indicates that too few consumers comparison shop when looking for a car loan—and only half of consumers who finance through an auto dealership negotiate the terms of their loan.

The CFPB's auto loan shopping sheet can be printed out and used when talking to lenders. It helps consumers understand loan factors, compare loans apples-to-apples, and get the financing that is right for their budget.

The Know Before You Owe auto loan shopping sheet can be found here.

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