For millions of Americans, cars aren’t just a fun way to get around — they’re a necessity. They provide access to jobs, schools and essential services. They help build financial independence and unlock opportunities that would otherwise be out of reach.
Yet for many minority borrowers, the road to an auto loan is often littered with hidden costs. According to research published in The Review of Financial Studies, an estimated 80,000 auto loans are denied each year in the U.S. based on racial bias.
In their study, Rice University’s Alex Butler and James Weston uncover troubling inequalities in America’s auto loan market. Using a dataset that spans over a decade, the experts at Rice’s Jones Graduate School of Business find that Black and Hispanic borrowers face higher rejection rates and steeper borrowing costs than white borrowers, even when they have comparable credit profiles.
Auto loans are the most widely used form of installment credit in the U.S. with more than 100 million borrowers as of 2017. Unlike mortgages and student loans that operate under stricter regulations, the auto loan market is relatively obscure, shaped by personal interactions between lenders and borrowers. This absence of oversight creates an environment where bias can thrive.
The study considers multiple explanations for the observed disparities such as differences in borrower behavior or creditworthiness. But the results show that minority borrowers are 1.5% more likely to be denied an auto loan than white borrowers with similar financial characteristics. Among subprime applicants where creditworthiness is already marginal, this gap grows to 2.4%.
Even when minority borrowers secure loans, they face an additional financial penalty. The study reveals that Black and Hispanic borrowers pay 0.7% more in interest rates than white borrowers. For the average minority borrower, this translates to an extra $410 in present value terms over the life of the loan. In states where racial bias is more pronounced, this gap widens even further — to 1.25%.
Weston emphasizes the broader implications: “This isn’t just about a few thousand dollars here and there — it’s about access to opportunity. The disparities we found in the auto loan market are another roadblock for minority borrowers trying to build a better future.”
Auto lending is unique from other markets like credit cards, where decisions are mostly automated and leave little room for human bias. For borrowers seeking to secure auto financing, personal interactions are more likely to create unequal outcomes.
To uncover these disparities, the research team (which included Erik J. Mayer ’18, a Rice Business doctoral graduate) linked credit bureau records with demographic data from the Home Mortgage Disclosure Act of 1975, allowing them to examine borrower financial characteristics alongside race and ethnicity. What they found provided a uniquely detailed view of auto lending outcomes.
After accounting for factors like credit scores, income, debt-to-income ratios and ZIP codes, the researchers concluded that racial bias — not differences in financial health — drives the disparities in auto lending. Even more striking, the study found that Black and Hispanic borrowers are actually less likely to default on their loans than white borrowers with similar financial profiles despite facing higher costs and stricter approval standards.
“We wanted to move beyond anecdotal evidence and create a dataset that could definitively measure disparities in auto lending,” says Butler, the Jesse H. Jones Professor of Finance at Rice. “By combining credit bureau and mortgage data, we were able to uncover patterns that hadn’t been documented before — and the results were troubling.”
The study highlights how government rules can help reduce racial bias on auto lending. In 2013, the Consumer Financial Protection Bureau created policies to fight racial discrimination in auto lending. During that time, the difference in interest rates between white and minority borrowers dropped by 60%. But those policies were rolled back in 2018, raising concerns about whether the progress would last.
Questions remain about the long-term impact of these disparities and how they can be addressed through better policy or innovative lending practices. “Our study shows this problem isn’t inevitable — it can be addressed,” says Weston. “The challenge is sustaining the kinds of oversight and accountability that can make lending markets fairer for everyone.”
Weston, senior associate dean for degree programs and the Harmon Whittington Professor of Finance, will be the featured speaker at the upcoming “Owl Have You Know Podcast” live event at 5:30 p.m. March 4. The evening of insights, stories and inspiration will be held in the Anderson Family Commons at Rice’s McNair Hall.
Based on research published in The Review of Financial Studies by Butler, Weston and Mayer (University of Wisconsin): “Racial Disparities in the Auto Loan Market,” this article originally appeared in Rice Business Wisdom.
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