The American dream rewards risk takers, entrepreneurs with big hairy audacious goals. No wonder companies such as Amazon, Apple, Google and Microsoft lead the list of the most valuable companies in history. The most valuable corporations usually have a relatively singular focus and outcompete their peers on a small number of products. You could say, these entrepreneurs put all of their eggs in one basket and then watch it closely.
Put all your eggs in one basket and then watch it closely -- Andrew Carnegie
Lenders, however, need to choose a different strategy. They are primarily focused on limiting their losses. Auto loan companies, for example, always manage their portfolio and adjust terms based on the historically observed risk. Credit Scores help auto loan companies 'price' the risk of the borrower they are working with: if the borrower's probability of default is high, the borrower's Credit Score will be low. If the borrower's probability is low, in contrast, the borrower's Credit Score will be high.
Intrigued by this theory, we performed a study on CarMax's recent auto loan securitization. We wanted to find out whether Americans are getting the same loan terms independent of the state they're living in. CarMax is the nation's biggest used car retailer when measured by volume of cars sold. Through CarMax Auto Finance, CarMax actively manages its loan portfolio and therefore serves as a great data source.
Table of Contents
Louisianians take out the biggest auto loans
South Dakotans have the highest and North Dakotans the lowest credit scores
South Dakotans pay the lowest and North Dakotans the highest rates
Mainers' average auto loan term is 5% shorter than North Dakotans'
Hawaii and Alaska experience an extraordinary high rate of repossessions
Refinance your auto loan and save thousands of dollars
Will we see big differences in loan terms, credit scores and repossession rates across state borders or is the America population rather homogenous?
We focused our study on five metrics:
Average auto loan amount
Average Credit Score
Average auto loan rate
Average auto loan term
Average repossession rate
In the following, we will shed some light on what we discovered on a state by state level.
Louisianians take out the biggest auto loans
In our study, we observed a big delta of $3,500 between the average auto loan amounts taken out by car shoppers in Louisiana vs. Oregon. Louisiana is the state with the highest average auto loan amount of $21,000. Oregon, in contrast, is the state with by far the lowest average auto loan amount around $17,500 for a used car purchased at CarMax and financed with CarMax Auto Finance.
Right behind Louisiana are Wyoming, Mississippi, North Dakota and Arkansas with an average auto loan amount of $20,800. and right behind Oregon are New Hampshire, Idaho, Rhode Island and Nebraska follow with an average auto loan amount of $18,400.
These numbers are fascinating, especially when put into perspective with the GDP per capita of the respective states. Louisiana's GDP per capita in 2017 was $49,539 and the median household income was $47,942. That means, if the average used auto loan in Louisiana is $21,000, Louisianians take out loans of around 43% of their yearly income for their used cars.
Oregon, in contrast, looks like a state of savers! Despite a much higher median household income of $59,393 than Louisiana, Oregonians only spend $17,500 on their used car loans, which equals around 29% of their yearly income.
South Dakotans have the highest and North Dakotans the lowest credit scores
When studying the credit scores of the borrowers in CarMax's portfolio, we were astonished to find that two neighboring states are on both ends of the credit score spectrum: with a credit score of 720, the South Dakotans in CarMax's auto loan portfolio have the highest Credit Scores followed by Nebraskans, Kansans, Utahns and Coloradans with an average of around 710.
On the other end of the credit spectrum, we discovered that North Dakotan CarMax borrowers have the lowest Credit Score of around 665 followed by Louisianians, residents of Hawaii, Mississippians and Arkansans with an average Credit Score between 670 - 675.
Credit Scores are a proxy for auto loan rates, i.e. if you have a high Credit Score you usually qualify for a low rate and if you have a low Credit Score, you usually have to bear a higher rate. That said, in a different study we found that the market for auto loan rates is inefficient - so let's take a look at the actual rates of borrowers in the CarMax portfolio in the following.
Consistent with Credit Scores, we find that South Dakotans pay the lowest and North Dakotans the highest rates
As mentioned above, Credit Scores are a proxy for auto loan rates. We are therefore not surprised that South Dakotans have the lowest rate of below 6.8% on average and North Dakotans the highest rates of close to 9.8% on average.
Let's put these numbers into perspective: the average auto loan of a South Dakotan is $19,600 and the average auto loan of a North Dakotan is $20,800. If we assume an average term of 67 months, monthly payments would result in:
South Dakota: $357, the total interest expense over 67 months would be $3,950
North Dakota: $409, the total interest expense over 67 months would be $6,190
In other words, North Dakotans on average pay $52 more per month and $2,240 more over the term of the loan.
Other than South Dakota, the states with the lowest observed rates are Nebraska, Massachusetts, Kansas and Utah. On the other end of the spectrum and other than North Dakota, the states with the highest observed rates are Mississippi, Louisiana, Arkansas and Hawaii.
Once again, our findings surprised us. We wouldn't have expected differences as stark as the observed ones in auto loan rates of bordering states.
Mainers' average auto loan term is 5% shorter than North Dakotans'
Auto loan terms are usually available in 12 month increments. The most common terms are 48, 60, 72 and 84 months. We've been observing auto loan terms getting longer over the years and are therefore not surprised that the median term in CarMax's portfolio is around 67 months.
We are surprised to find, however, that the Mainers' average auto loan term is 5% shorter than North Dakotans'. While most states hover around an average term of 67 months, we see outliers on the fringes:
The average loan term in Maine is around 65.5 months followed by Nebraska, New Hampshire, South Dakota and Wyoming which are all around 66 months. On the long end of the spectrum, we found that North Dakota has the highest average loan term with above 69 months followed by Florida, Hawaii, Delaware and Louisiana which are all between 67.8 and 68.6 months.
Hawaii and Alaska experience an extraordinary high rate of repossessions, 6 times the rate of the lowest states
Repossession laws differ from state to state. Your lender can usually repossess your vehicle when you default on your payment. Studying CarMax's recent auto loan portfolio, we made some shocking observations:
Around 6% of all cars financed through CarMax Auto Finance in Alaska and Hawaii are repossessed. The rate drops significantly to around 4% and below for New York, North Dakota and Florida.
On the other end of the spectrum, we're delighted to find that while the median repossession rate is only around 1.8%. In Wyoming, Nebraska, New Hampshire, South Dakota and Washington we even observe repossession rates below 1%..
The study above sheds some light on the borrowing behaviors and habits of CarMax Auto Finance customers. We found significant differences from state to state. CarMax Auto Finance proactively manages its losses through three main levers:
Interest rates: if your Credit Score is low, your rate tends to be higher
Repossession rate: if a borrowers fails to make payments, CarMax will try to repossess the car
Good subsidize bad: borrowers who make their payments balance out the risk of borrowers who default on their payments
The study made it crystal clear, borrowers from some states (marked in green in the charts above) subsidize borrowers in other states (marked in yellow above).
Refinance your auto loan and save thousands of dollars
When we performed the study above, we were astonished by how much auto loan terms and repossessions vary across different states. We felt frustrated that borrowers from some states in CarMax Auto Finance's loan portfolio seem to be subsidizing borrowers from other states.
The good news: if you have an auto loan with CarMax Auto Finance or any other lender, you can fix this market inefficiency through refinancing. WithClutch.com is a fully digital platform that lets car owners like you do so from the comfort of their own home.
No need to set a foot in a bank or credit union. You can lower your rate or get cash in as little as 20 seconds. Follow three simple steps to refinance your auto loan, get approved in seconds and save thousands in minutes.
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