Servicemembers Face Higher Auto Loan Costs and Greater Risks Compared to Civilian Borrowers

• The Department of Defense considers military financial readiness a key component of operational readiness.
• But recent CFPB research shows that the unique challenges of U.S. servicemember households — including frequent station changes — result in higher auto loan interest rates and overall costs compared to civilians.
• The study found “significant limitations” in federal legislation designed for servicemember auto loan borrowers, paving the way for reform.

Military members often don’t experience a debt crisis as severely as civilians. Not only do they usually pay less than market-rate interest on loans, they also benefit from federal and state protections in foreclosures, repossessions, and court cases associated with financial missteps.

But protection gaps in the rules have them paying more for auto loans than civilians and experiencing “increased financial risks at many points in auto lending compared to non-servicemembers,” according to a Consumer Financial Protection Board (CFPB) study.

The report, released just two days before Biden-appointed CFPB director Rohit Chopra left the agency on February 1, highlights the specific challenges of our youngest servicemembers, who receive the lowest pay and may lack financial literacy skills.

Servicemembers experience “increased financial risks at many points in auto lending compared to non-servicemembers,” according to the CFPB.

But in general, it also convincingly shows that frequent household PCS (permanent change of station) moves and other impediments of military service (such as limited career and job prospects for spouses) put servicemembers in a particularly vulnerable position with respect to loans for personal transportation.

And that ultimately means a greater threat to American security. Although the Department of Defense has operated an Office of Financial Readiness since 2006 to help servicemembers succeed, this report from the Chopra version of the CFPB demonstrates there’s ample room for Congress and the administration to step in with additional protections aimed at strengthening American military readiness.

“The financial challenges faced by servicemembers in the auto lending market have implications for the economic well-being and financial stability of servicemembers and their families,” the report read.

Having secure personal transportation is fundamental to most Americans’ notions of independence, mobility, and the ability to access work, education, and essential services on their own terms.

The same holds for military members. The CFPB study looked at de-identified data on auto loans originated or serviced by respondents between January 1, 2018, and December 31, 2022 — a total of 21.4 million loans that generated a set of more than 200,000 with borrowers or co-borrowers flagged as servicemembers.

“Originations to servicemembers are approximately one percent of all originations by year in the dataset — a higher proportion of active-duty servicemembers than their estimated 0.48 percent share of the U.S. resident population age 18 years and older,” the report stated.

Key findings of the study illustrate the disadvantages of the auto loan status quo to servicemembers. For new vehicles, for example (figures for used cars follow a similar pattern), military personnel typically took out loans that were more than $2,200 higher and made down payments that were more than $1,100 lower than civilians.

Furthermore, APRs for servicemember auto loans were 0.6% higher on average for both new and used vehicles, resulting in an average payment of $644 a month, $20 higher than civilians. Do the math, and you’ll find that seemingly insignificant hike resulted in an additional cost of about $1,300 over the life of the average loan.

What’s more, military members who wanted add-on features such as extended warranties and guaranteed asset protection products (often recommended to borrowers who finance with low down payments) typically paid more for those, too — to the tune of $140 more on average than civilian borrowers.

The report did not provide a single dollar figure quantifying the total cost of auto loan disparities between servicemembers and civilians. Extrapolating from the average monthly payment example above is one way to get an idea of their significance.

Fortunately, some of the protections associated with military service resulted in fewer servicemembers having their vehicles repossessed. The report suggests that limitations in the law have partly given rise to the disparities we see in the other areas of scrutiny — hence the need for further action.

For example, the Military Lending Act restricts predatory lending practices but makes exceptions for many traditional auto loans. That may lead to outsized loans and terms for military borrowers, particularly younger members.

Another vulnerability is in the Servicemembers Civil Relief Act, which addresses some forms of vehicle repossession but limits interest rates only for funds borrowed before active duty.

But laws and rules aren’t the only problem, the report asserts. Many military bases lack access to reliable public transportation, putting additional pressure on servicemembers to secure their own wheels.

Dealerships tend to be sparse in remote base areas, leading to a lack of competition and choice. And dealers — true to form — may actually target young military members who expect to get a great price when wearing the uniform but who don’t have the savvy to negotiate for one.

PCS moves exact a constant additional toll for many. It’s challenging to build beneficial relationships with local merchants when you’re moving all the time. And military spouses often can’t take advantage of their educational attainment, degree status, and job experience to advance and earn more in their careers.

The consequences of falling prey to personal vulnerabilities and breakdowns in legal protections can be severe for servicemembers. In fact, severe financial disruptions can result in disciplinary action, loss of security clearance, delayed career progression, and job loss, the report states.

Bad lending decisions that may result in delinquencies and defaults always harm the economy as a whole in addition to the individual loan consumer. In the case of servicemembers, the harm extends directly to national security. Laws in the states and the District of Columbia may provide significant additional protection, but the results are far from ideal.

In identifying military financial readiness as a component of operational readiness in 2021, the Congressional Research Service defined financial readiness as “the state in which successful management of personal financial responsibilities supports a servicemember’s ability to perform their wartime responsibilities.”

This CFPB report from the previous administration points to opportunities for unified action to achieve that objective for all servicemembers.