Women and Minorities Are Charged More for Car Loans

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.