Most Americans think buying a car from a dealership goes something like this: you find the model and specifications you want and then negotiate a price. After that, the manager starts a loan application. Once a lender compiles information on your creditworthiness and decides on an interest rate, you’re done. You drive off in a new car and with a fair amount of new debt—auto loans in the United States amount to $1.5 trillion, or almost 10 percent of household debt.

But dealers can bump up the loan’s interest rate above the lender’s offer (i.e., charge a “markup” over the interest rate) and pocket the extra revenue. Dealers do this a lot more to women and minorities, who end up paying higher average rates than white men, write University of South Carolina’s Cem Öztürk, University of Wisconsin’s Cheng He, and Chicago Booth’s Pradeep K. Chintagunta. The most vulnerable buyers in their study paid almost 28 percent more in markups, on average, than everyone else.

“We went into this thinking it unlikely we’d see anything,” Chintagunta says. “The fact that we found this difference was a bit surprising.”

From a sample of 20 percent of US car dealerships, the researchers analyzed new and used car sales between January 2004 and December 2015. For each transaction, they collected information on the rate offered by the lender, the dealer markup, the amount of financing, and the percentage of the down payment. To measure any gender gap, they compared dealer financing markups between women and men from the same postal code who purchased identical vehicles from the same dealer in the same week. To measure a racial gap, they compared markups among consumers who came from census blocks with a relatively high non-white population against those from blocks with a low percentage of minorities.

The researchers find that dealers charged women 0.6 percent, or 0.73 basis points more in markups than men, on average. While this amounted to a small increase at the individual level—averaging $9 over five years—it added up to an extra $40.3 million a year nationwide.

The researchers only find significant evidence of the gender gap in counties where most voters were Republican. And “the gender gap increases for women who are relatively older,” the researchers write.

Here’s who paid the highest dealer markups

Minorities suffered an even larger markup, of 2.6 percent, or 4.1 basis points, on average. For individuals, this amounted to about $50 over five years, resulting in an extra $226 million a year from the difference. These markups targeted Black and Hispanic buyers; there was no significant effect with Asian buyers, the researchers find. Unlike the gender gap, the racial gap was not limited to Republican counties.

The findings varied by state, with the largest observed gender gaps in South Dakota and Wyoming and the largest racial gaps in Tennessee and Rhode Island. The researchers also uncovered a set of characteristics that exacerbated the discrimination. Consumers with lower education levels, those who were not trading in a car, and those in markets with fewer financial institutions got hit with larger markups. The most vulnerable buyers paid almost 28 percent more in markups, on average, than everyone else.

“What actually proved somewhat reassuring is that over time this gap seems to be going away,” Chintagunta says. Over the 12 years of the study, the differences in financing markups began to shrink. But the researchers also write that more proactive efforts are needed to target unfairness in auto lending.

Policy makers should push for greater transparency around the practice of dealer financing markups, the researchers argue. Attorneys general could use the researchers’ state-level estimates to ferret out the most unfair practices, they suggest.

“That’s the top-down approach, but there is also a bottom-up approach where consumers simply go out and look for more quotes,” Chintagunta says. The researchers considered the number of banks or financial institutions in a county to indicate the level of competition there. “Where people are able to get competing offers, we tend to see smaller gaps, so it’s always wise to check what a local bank or credit union can offer against what the dealership does.”

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