Federal Reserve Bank of St. Louis: Bridges

Katie ArnoldJP In The News

From the Federal Reserve Bank of St. Louis: Bridges

Vehicle Financing Inequality: What Can Be Done?
By Cait Baker , Theodore Floros , Katie Kristensen

This research was initially funded through a grant from the Mastercard Center for Inclusive Growth and with data preparation and analysis by the Washington University Social Entrepreneurship and Innovation Lab.’

In many communities within the United States, poor public transportation makes access to a personal vehicle a critical access point for opportunity.

In St. Louis, nearly 80,000 households do not have access to a car. Research1 and advocacy2 have indicated that mobility is one of the strongest factors in a household’s odds of escaping poverty. Work by the Brookings Institute (PDF) identified that St. Louis ranks sixty-eighth (of 100 total metropolitan areas within the U.S.) in terms of metropolitan, city and suburban transit assessibility, and access to jobs by transit.

The Equity Indicators Baseline Report (PDF) for the City of St. Louis (2018) shows workers who live in majority-black census tracts make up 60% of those who commute via public transit. While almost 75% of drivers have a commute of 30 minutes or less, only 25% of those accessing public transportation have a commute under 30 minutes, with 35% having commutes over an hour long. The differences in vehicle ownership are stark. According to a report from the East-West Gateway Council of Governments, black households are 4.5 times more likely (PDF) to lack access to a vehicle compared to white households.

Yet, for families seeking access to the opportunity and self-determination that a vehicle can provide, a high-interest car loan can be responsible for another roadblock on the path out of poverty. An analysis of 2019 client data from Justine PETERSEN, a Missouri-based nonprofit with a mission of connecting institutional resources with the needs of low- to moderate-income individuals and families, revealed a 15% average interest rate on client car notes, with over a quarter of the loans having interest rates above 20%.

Buy-Here, Pay-Here Providers

Among Justine PETERSEN’s clients engaged in credit building, over 13% have a vehicle-related collection or repossession on their car note. The majority of these loans are marked as being originated by local buy-here, pay-here (BHPH) providers that primarily offer to lend to subprime borrowers. According to a 2010 article from the Center for American Progress, in the case of secondhand auto loans, the borrower’s and lender’s incentives are usually not in alignment. Whereas consumers are looking for the lowest interest rates, they instead face lenders who profit not from the buyer’s success but his or her failure. While the Consumer Financial Protection Bureau extended mandatory underwriting provisions to require consideration of the ability to pay in November 2017, this rule did not include auto loans.

Independent auto finance companies and BHPH dealers are often able to skirt state usury laws. While these loans are toxic to consumers, they are immensely profitable within the financial system.

St. Louis as an Example of Predatory Reality

St. Louis represents a salient example of this predatory reality that is present across the country. Experian’s State of the Automotive Finance Market (PDF) data indicate that consumers with subprime credit scores are paying a significant premium for access to a vehicle.

In referencing the table below, this premium translates to individuals with deep subprime credit scores paying on average the most per month ($409) for the lowest-value vehicle (average loan amount $14,584), compared to prime and super-prime borrowers. These trends flow into auto insurance costs as well, with a poor credit score often costing more over a year than a driving-while-intoxicated conviction.

Loan Type Average Term Average Monthly Payment Loan Amount Total Paid Average Interest Rate
Deep Subprime 56.61 $409 $14,584 $23,153 20.95%
Subprime 58.15 $398 $15,254 $23,143 18.97%
Nonprime 61.48 $372 $17,162 $22,870 13.14%
Prime 63.72 $357 $19,372 $22,748 7.25%
Super Prime 61.26 $359 $19,639 $21,992 4.88%
SOURCE: Experian

Since the Great Recession, the auto market has seen the rise of nonbank auto finance entities3, such as independent auto finance companies and BHPH dealerships. Both of these structures have a deep appetite for subprime lending, with 20.95% of BPPH loans falling into the deep subprime category, compared to 1% of loans from banks and credit unions. Consumers accessing products from these emerging entities are often steered towards predatory financing by the dealership.


In conclusion, the services and access to safe and affordable credit provided by community development financial institutions (CDFIs) are critical in creating a pathway for communities to escape and avoid predatory auto financing. Knowingly, the services provided by CDFIs can only be accessed if they are known and understood. The ease of access and rapidity of predatory vehicle lending is what makes BHPH loans often predatory.

It will take our entire financial and social ecosystem working together to make CDFI vehicle loans the product of choice, instead of the exception. Together, we can make a financially safe choice the easy choice for every member of our community.

Cait Baker, Theodore Floros and Katie Kristensen serve as the housing counselor, evaluation associate and credit building manager, respectively, at Justine PETERSEN.