On January 29, the Consumer Financial Protection Bureau (CFPB) released a report stating that U.S. military servicemembers "pay higher costs and face greater financial risks" than their civilian counterparts when financing vehicles. The report suggests that servicemembers may be at a disadvantage, but a closer examination points to methodological issues in the CFPB's analysis. Even without these issues, there are straightforward explanations for the discrepancies noted in the report.
The report is based on data from only six auto lenders and includes limited information about individual borrower characteristics. These constraints make it difficult to draw valid comparisons between servicemembers and civilians.
The report highlights several points:
- Servicemembers pay the same amount for vehicles but incur more interest and fees than civilians. It suggests that servicemembers might generally opt for lower down payments compared to other groups, leading to higher interest payments over time.
- Servicemembers reportedly choose longer-term finance contracts than other groups, which directly impacts the total interest paid.
- The report speculates that servicemembers tend to be younger than other groups, implying they have less established credit histories and less time to save money.
While claiming that servicemembers face higher interest rates on vehicle finance contracts compared to others, the CFPB acknowledges that interest rates are determined by individual characteristics. If servicemembers have shorter credit histories due to their youth and select longer-term finance contracts, some increase in relative interest rate is justifiable. The CFPB notes this discrepancy amounts to nearly $20 a month, which it describes as a small difference.
Additionally, the report states that servicemembers purchase voluntary protection products more frequently and at higher costs than other groups. If this group is buying more expensive cars and financing them over longer terms, it stands to reason that voluntary protection products would cost slightly more.
The vehicle finance industry offers various convenient loan products for consumers seeking vehicle financing. A report based on limited or potentially unrepresentative data that mischaracterizes differences arising from consumer choice and legitimate factors as predatory can be misleading.