Auto dealer loan markups are not uncommon in the auto loan financing market but consumers must know the consequences of these loan types. When the car loan terms are finalized, a dealer sometimes marks up the interest rate of a particular car loan in an effort to make profits for any reason they see fit. This increase in interest rate greatly increases the loan’s fees, which the auto dealer eventually keeps as a “finder’s fee” when the loan is sold to a third party financing company.
This type of car deal loan agreement is not illegal but some feel it’s unethical, as the reasons for increasing the interest rates on certain loans are arbitrary. Many of the class action lawsuits against this practice stem from consumers feeling misled or claiming the lender increased the rate prejudicially.
Here are some tips to avoid dealer markup victimization.
Auto loan markups range from zero to 50 percent, depending on the state laws governing the cap on auto loan markup. Consumers should strongly question auto dealers as to their markup practices, and seek additional third party assistance whenever possible while looking for the right auto loan for their situation.
One of the ways dealer representatives can sometimes trick customers into higher interest rates is by “financial” sleight-of-hand. This is where they’ve agreed to lower the cost of one element in order to raise another, often talking past the customer and using specific sales techniques. This includes cutting warranty costs and raising interest rates, or any kind of similar combination. Even tax, tag and title costs can be part of the confusion.
One very common things customers let dealer representatives get away with is a financing deal based on a monthly payment. A buyer should never settle for accepting a certain monthly payment with no fixed total cost, but that’s what often happens. Sales reps offer a specific monthly payment, but may not mention how interest rates affect that payment, and how much the customer might be paying overall.
When you ask your dealer specifically about the rates that they are asking, they may come up with any number of excuses for having higher interest rates. Generally, a lot of auto finance experts agree that none of these are particularly valid and that higher interest rates constitute as dealer markups. If the dealer’s interest rate offer is over 10 percent, see if you can get 8 or 9 percent from an outside lender. The reality is that the dealer makes money on the sale price of the vehicle. It’s not necessary for them to make money on a financing deal as well.
In some cases, customers with bad credit scores well under 680 or so may have to pay higher interest rates. In other cases, dealers may inflate ideas of sub-optimal credit in order to attach their dealer’s markup to a car financing agreement. In these situations, fixing the problem is as easy as calling up third party lenders and arranging better financing deals through them. Customers need to know that they are not required to finance through a dealership. Call local banks, credit unions and other lenders and ask them about blank check auto loans or vehicle specific auto loans that carry the interest rates you want and the total payments you’re comfortable with.
Many states have attempted to protect the consumer from auto dealer loan markups however it’s difficult to regulate the practice, as many financing companies have private agreements with certain auto dealers in place already. Many consumers never see the true interest rate they would be approved for at a third party institution because it’s common practice for the auto dealer to only disclose the markup price. All of the above strategies can help car lot customers avoid being taken advantage of by a dealership for a financing package on their next car or truck.