As auto dealer profits are squeezed through aggressive online price advertising, they are searching for other ways to make money on your car purchase. A huge source of profit for dealers is when they arrange your financing. The dealer finds a creditor willing to give you a 4.9% loan but tell you that you qualify for a 6.9% loan. The dealer makes a profit on this “buy rate”.
A recent Washington Post article describes this unfair practice. The Article entitled “Guess how much cheaper your auto loan would be if dealers had to play fair” describes how dealer make a profit on your good credit.
“When a consumer chooses in-house financing with an auto dealer, the dealer sends the customer’s financial information to a lender and is told the rate that the customer qualifies for. But it’s legal for the dealer to turn around and charge the customer a higher interest rate. You might qualify for a 5.9 percent interest rate, but if the dealer can get you to agree to a loan at 11 percent, the lender will kick back more than $1,000 to the dealership as pure profit. This discretionary markup of the interest rate allows auto dealers to arbitrarily increase their fees.”
“An analysis by the independent online auto-loan marketplace Outside Financial has found that dealers are charging an average markup of $1,791 per loan.”
How to avoid jacked up interest rates
This is a significant cost that the consumer can avoid by being aware and asking questions. For example, the consumer should ask what the buy rate is. This is the rate the bank has actually approved for your loan. You can ask to see the loan approval document sent by the bank to the dealer. The consumer can also avoid this by arranging their own financing or going to their preferred bank and applying for a loan to see the best interest rate they can be approved for.
“At a minimum, borrowers should be told how much their loan is being marked up, how much the dealer stands to profit and how that compares with average markup profit at that dealership. There’s no good reason dealerships should be allowed to shroud their loan profits. If customers were actually informed about the markup fees in their contracts, they could then decide whether to shop around for a different loan. “