Voices: Restricting auto loans could hurt the most vulnerable Utahns

In Utah, a car isn’t a luxury. It’s a prerequisite for working, parenting or simply getting anywhere.

In a metro area with fragmented public transit and fast population growth, access to a vehicle is often indistinguishable from access to opportunity. New research from the University of Utah shows that the mechanics of auto lending are shifting in ways both uncomfortable and unavoidable, especially for lower-income borrowers.

The study, which I co-authored with UCLA’s Mark Garmaise, and Adam Winegar of BI Norwegian Business School, follows more than 300,000 loans from a major U.S. subprime auto lender over nearly three decades. It reveals that when cars are discontinued (e.g. models like the Ford Freestyle, Pontiac Aztek or Oldsmobile Alero), they depreciate faster, cost less and disproportionately end up on lots frequented by lower-income buyers.

You might assume that makes these borrowers safer: Less expensive cars carry smaller risks. The opposite is true. When these discontinued cars are repossessed, lenders recover less from selling the vehicle. To compensate, they recover more directly from the borrower after default (e.g., wage garnishment, payment plans or legal collection.) Roughly one-quarter of the money lenders recover after a default is paid by the borrower after the vehicle is gone.

That outcome is troubling, but the framework that produces it is what matters. Economists typically think of car loans as secured lending: You get a loan because the lender can repossess the car. But this research finds that for the poorest buyers, auto loans function much more like income-based lending — supported less by the car itself and more by the borrower’s future earnings. That shift isn’t accidental or malicious; it is the mechanism that allows low-income borrowers, who cannot afford newer, more reliable cars, to access financing at all.

If the only collateral that mattered was car value, many lower-income Utahns would be denied credit and, in turn, lose access to employment opportunities and childcare if they are unable to afford a car. Their ability to borrow is literally grounded in lenders’ confidence that they will make payments over time, not that the car will be worth much if repossessed.

The research shows how this plays out: 1) Borrowers of discontinued cars put down higher down payments despite the cars being cheaper; 2) They carry higher loan-to-value ratios, meaning more debt relative to the car’s worth; and 3) In the event of default, they repay proportionally more out of pocket because the car isn’t capable of covering the loss. Rather than evidence of dysfunction, these patterns reveal how the market flexes to preserve access to auto credit for people with the least wealth.

It is tempting to see these findings and conclude that lenders must be reined in. It perhaps seems unfair to extract money after repossession. But that response risks misdiagnosing the core issue. If policymakers restrict lenders’ ability to rely on borrower income after repossession, the likely outcome is not gentler treatment, it is less lending to the very households who need it most.

In Utah, where a car is a gatekeeper to economic participation, that could worsen inequality, not reduce it. The research forces a harder conversation: How do we preserve access to credit while acknowledging that the structure that enables it comes with painful outcomes for those who fall behind?

Utah has some of the nation’s largest payment burdens for lower-income households, rising delinquencies and a steep run-up in used-car prices. That pressure isn’t going away. At the same time, fintech tools, such as income verification to automated payments, are expanding. The study suggests these innovations, unpopular as they sound, may actually benefit lower-income borrowers by enabling lenders to confidently issue loans based on income support rather than collateral value. The alternative, restricting such lending, risks trapping people without vehicles, and therefore without work.

The insight of this study is not that the system is broken. It is that the system is serving a difficult purpose imperfectly. Lower-income borrowers buy cars with low resale value. To extend credit in those cases, lenders must rely on borrower income. When those loans fail, borrowers keep paying because that is what made the lending possible in the first place. That’s not a story of exploitation, it’s a story about how financial markets stretch to enable mobility for households who otherwise could not finance a car at all, and about the painful edges exposed when those households fall behind.

This research doesn’t call for shutting down that lending model. It calls for grappling with its tradeoffs. Because in Utah, access to a car is access to the economy, and the bigger risk may be cutting people off from credit in an effort to save them.

Mark Jansen is an assistant professor in the David Eccles School of Business’s Department of Finance.

The Salt Lake Tribune is committed to creating a space where Utahns can share ideas, perspectives and solutions that move our state forward. We rely on your insight to do this. Find out how to share your opinion here, and email us at voices@sltrib.com.