For many Latino families, average household incomes in the past decade have gone down. Hispanics lost 66 percent of their household wealth following the Great Recession, and unemployment has been high among Latinos. This has resulted in two things. Households have reduced spending, but for big expenditures like mortgages, automobiles and higher education, families have to take on additional debt.
Yet in the area of student loans, and even more so with auto loans, Latino families are still being steered in many cases toward riskier and even predatory loans, according to a new report from the Center for Responsible Lending.
In the case of auto loans, for example, families with low credit scores have basically two options: Applying for a loan over the internet with a lender the consumer has never heard of, or financing through the car dealer. Low-income consumers or those with poor credit, for example, are more subject to yo-yo scams, where the dealer changes the terms of the initial loan yet refuses to give money back to the family if they don’t agree, and even threatens the consumer with auto theft if the buyer does not immediately return the car. Most families agree to the changes and pay interest rates of 5 percentage points or higher than conventional loans.
In 2009, car buyers paid 25.8 billion dollars in additional interest due to a dealer “markup,” which allows the dealer to raise the interest rate after the initial offering and agreement. Car buyers borrowing from subprime finance companies which marked up these interest rates were 33 percent more likely to get their cars repossessed. The study also found that in states like North Carolina, for example, 79 percent of consumers did not even know dealers could mark up the rates without their consent.
Another risky problem for car buyers is “loan packing” where the dealer “packs” the loan with other costs, like a car service contract, which is then marked up by almost 100 percent. This can add almost $1,800 to the price of the purchase. Then there is the BHPH (buy here pay here) loan, where the car is sold at almost double what the dealer paid for wholesale, and the consumer has to make a large down-payment and a weekly payment. While the dealer recoups what he paid for the car in about a year, they are quick to repossess the car if the buyer is late.
As credit has tightened, more low-income borrowers or those with subprime credit are using these kinds of services, warns the report.
In the area of student loans, the average student is graduating with around $25,000 in debt, and in 2008, eight percent of Latinos had debt of over $40,000. That percentage will increase as more Latinos pursue higher education. One way to limit risk is to take out federal loans instead of private student loans. Yet the study found that 40 percent of families had not used up their federal student loan eligibility, even though federal student loans have lower interest rates and easier payment terms. Private loans are riskier, since the uncapped adjustable rates make it harder for students to anticipate how much they will be paying years later. Private student loans cannot be discharged in bankruptcy.
“A recent survey of student loan borrowers with high debt levels found that about 65 percent misunderstood or were surprised by aspects of their student loans or the student loan process,” said the report.
Understanding the risks of student loans is especially important as higher unemployment and a tighter job market has made it harder for more students to repay and has contributed to more loan defaults. In for-profit colleges, for example, which account for 10 percent of student enrollment, they see 47 percent of federal loan defaults.
The report urges some reforms to protect families: encouraging schools to certify that students have exhausted their ability to get federal and state loans before they obtain private loans, allowing discharge of private student debt in bankruptcy court, more loan counseling for student and families, and increasing the oversight of for-profit colleges.
Graciela Aponte, a communications and policy analyst at the Center for Responsible Lending, urges Latino families to visit non-profit centers in their communities to obtain financial counseling and guidance before embarking on a car or student loan. ”Many of these predatory lenders are targeting Latinos, or other minorities and military families,” Aponte explains. “Unfortunately you do have people looking to offer some families the worst, higher-fee products, so you have to be on the lookout.”