The Hidden Inequality in Auto Lending
Each year, an estimated 80,000 auto loan applications in the U.S. are denied to minority borrowers due to racial bias.
Based on research by Alexander Butler, James Weston and Erik J. Mayer (University of Wisconsin)
“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.”
Key findings
Black and Hispanic borrowers are 1.5 percentage points more likely to be denied auto loans than white borrowers with similar financial profiles.
Among subprime borrowers, this disparity increases to 2.4 percentage points, preventing an estimated 80,000 minority applicants from securing loans annually.
Despite facing higher costs and stricter approval standards, Black and Hispanic borrowers default on auto loans less frequently than white borrowers with comparable credit profiles.
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 groundbreaking research published in The Review of Financial Studies, an estimated 80,000 auto loans are denied each year based on racial bias.
In their study, Rice Business professors Alex Butler and James Weston uncover troubling inequalities in America’s auto loan market. Using a dataset that spans over a decade, they find that Black and Hispanic borrowers face higher rejection rates and steeper borrowing costs than white borrowers, even when they have comparable credit profiles.
A Closer Look at Racial Bias in Auto Lending
Auto loans are the most widely used form of installment credit in the United States, with more than 100 million borrowers as of 2017. Unlike mortgages and student loans, which 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 percentage points 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 percentage points.
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.”
A Unique Dataset
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 — Rice Business Ph.D. ’18) linked credit bureau records with demographic data from the Home Mortgage Disclosure Act (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, despite facing higher costs and stricter approval standards, are actually less likely to default on their loans than white borrowers with similar financial profiles.
“We wanted to move beyond anecdotal evidence and create a dataset that could definitively measure disparities in auto lending,” says Butler. “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 Road Ahead
The study highlights how government rules can help reduce racial bias on auto lending. In 2013, the Consumer Financial Protection Bureau (CFPB) 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.”
See Butler, Mayer and Weston, “Racial Disparities in the Auto Loan Market.” The Review of Financial Studies. 36 (2023): 1-41. https://doi.org/10.1093/rfs/hhac029.
Harmon Whittington Professor of Finance
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