For many American families, cars are an essential part of everyday life. And in rural areas, where public transportation options are limited and services are far away (PDF), cars are critical to accessing work, school, and basic necessities like grocery stores. But because most cars are purchased using loan financing, unpaid auto loan debt is a risk to American families with no choice but to rely on cars.
Native American people are nearly twice as likely to live in a rural area compared with the general US population, making car access especially integral to their lives. About a quarter (PDF) of all tribal nation residents live within a mile of a supermarket compared with nearly two-thirds of Americans.
When it comes to financing a vehicle, the odds are stacked against Native American buyers. The Consumer Financial Protection Bureau found (PDF) people of color were offered worse rates and treated more disrespectfully than their white counterparts, even if those counterparts had worse credit history, and other research suggests Native Americans may be offered less credit when they apply. Such barriers make it difficult for Native American consumers to gain much-needed access to an affordable vehicle.
But it doesn’t have to be this way. Policymakers can take concrete steps to help lessen the burden for these communities.
Native American communities experience disproportionate auto debt
Owning a car is significantly more expensive for the 4 in 10 consumers with subprime credit scores (or a Vantage score below 600) living in majority-Native communities.
Subprime credit scores greatly increase the cost of borrowing and constrain the types of auto loans residents can access. The high cost of borrowing means residents of these communities struggle to repay their loans, with delinquency rates three times higher than other communities. Systemic barriers to accessing affordable credit, rooted in generations of federal policies undermining tribal sovereignty and wealth, means borrowers pay more for the credit they can access, which can increase their indebtedness and make it challenging to access low-cost services later (PDF).
Additionally, subprime consumers are far more likely to become delinquent on their debt than their counterparts with prime loans. The latest update of our data dashboard, Debt in America, finds 21 percent of subprime consumers with an auto loan are delinquent, compared with fewer than 1 percent of prime consumers. This means borrowers in Native American communities may have higher default rates on auto loans than borrowers in communities with higher credit scores.
Auto lenders target Native American communities
Native communities’ need for cars and disproportionately high subprime credit score rates provide fertile ground for a market ripe with predatory loans because lenders take advantage of consumers’ constrained access to more affordable auto loan options.
The Navajo Nation Human Rights Commission (PDF) has uncovered evidence of vehicles purchased under unfair contracts with unclear terms in Navajo Nation. They found predatory lenders sought to exploit their remote locations and language barriers that prevent consumers from properly researching their options or fully understanding the unfavorable terms of their loans.
Alleviating the burden of auto loans in Native American communities
To alleviate auto debt and break the cycle of predatory lending in Native American communities, policymakers can consider the following policies, advocated by tribal nation leadership.
- Provide more affordable options for auto financing by funding and strengthening Native-owned financial institutions. Native credit unions or loan funds often specialize in providing low-interest loans and are designed to bring affordable credit to underbanked tribal nations. Native credit union loans are backed by investment funds from tribes, federal agencies, or philanthropic organizations and can often be tailored to meet the needs of specific communities.
For example, the Winnebago Tribe of Nebraska created their own investment corporation, Ho-Chunk, Inc. (HCI). In response to testimonials from tribal citizens who had their credit damaged by predatory car loans, HCI created Rez Cars, a used car dealership designed to help customers build or repair credit through affordable car loans. The company has been relatively successful so far, with few reported defaults.
Policymakers could evaluate, fund, and support similar programs in other tribal nations to provide communities with accessible, affordable auto loan credit.
- Increase government regulationson interest rates and loan termsto hold auto lenders accountable. Current laws vary greatly by state and are often complicated, making it hard for consumers to tell if the rates they’re being offered are within regulation. Many state laws also contain legal loopholes that allow lenders to overcharge without breaking the law.
Closing these loopholes could help reduce predatory auto loans, but such measures must be paired with other policies that continue to provide low-cost credit to tribal nations.
- Increase financial capability. The National American Indian Housing Council (PDF) found that tribal members, when surveyed, rated “legal advice or services for loan or credit problems”—or financial knowledge, which is a key component of financial capability—as their most needed service. And many Native communities report that financial capability has helped reduce high-cost loan use.
The Confederated Tribes of the Umatilla Indian Reservation created a financial education program (PDF), alongside other savings and asset-building programs, in response to high levels of poor credit and predatory loan use in their community. Reports show the program has assisted in reducing high-interest loan use and has led to an uptick in loans purchased through a local credit union. This program could be a model to expand in other tribal nations.
Affordable vehicle financing is critical to a high quality of life for rural residents. Native Americans face particular barriers, stemming from lender targeting and racial prejudices, to getting a fair auto loan. Providing low-cost loan alternatives, improving loan regulations, and providing stronger financial capability around loans could help Native American communities secure reliable transportation without the risk of falling into the hands of a predatory lender.