Beware of car financing markup
By MICHELLE SINGLETARY
02/01/2004
WASHINGTON -- If you're looking for a new or used car and you're going to use dealer-arranged financing, consumer groups have a message for you - watch out. You may pay more for that loan than necessary, especially if you're black or Hispanic.
This week the Consumer Federation of America (CFA) released a report titled, "The Hidden Markup of Auto Loans." In the report, CFA attacks a common practice in the auto-lending field in which dealers mark up interest rates on car loans.
These finance charges typically add at least $1,000 to the cost of an auto loan, and are costing consumers as much as $1 billion annually, said Stephen Brobeck, executive director of CFA, a nonprofit association of 300 consumer groups.
The higher-priced loans affect about one in four consumers who get their car financing through dealers, the report concludes.
The 'skin tax'
In addition, the report says, the subjective nature of dealer markups has led to discrimination against African-Americans and Hispanics.
"Finance markup charges have amounted to a costly skin tax, burdening African-Americans with even higher costs on one of the largest purchases they are likely to make in their lifetimes," Jesse L. Jackson, president and founder of the Rainbow/PUSH Coalition, said in a release.
What's also aggravating about this practice is that blacks and Latinos with good credit records are paying more for dealer-arranged loans, said Brenda Y. Muniz, policy analyst for banking and financial services for the National Council of La Raza.
"I don't think people know that this practice exists," Muniz said. "And those who know it exists - regulators and legislators - should be doing something to curb this practice."
You're darn right they should.
Auto loan markups are a devious way for car dealers to earn additional profit. And I make no apologies for using the word "devious," because for the most part the markups are kept secret. Here's how this practice plays out:
A consumer decides to let the dealership handle the financing on a car. The dealer contacts a lender. The lender, taking into account the potential buyer's credit history and other information, such as the type of vehicle being purchased and length of the loan, approves the loan application for a certain annual percentage rate known as the "buy rate."
Unbeknownst to many consumers, the dealership may decide to increase the buy rate for no other reason than it can. It's a legal way to pick people's pockets. So, for example, a person's buy rate might be 5 percent, but the dealer might tell a consumer she's been approved for a 10 percent loan.
How much is enough
The industry argues that auto dealers should be paid for helping arrange financing for their customers.
I do agree with NADA that dealers are providing a service when they act as finance middlemen. How much should they get for their work?
"A fee of $100 to $200 is more than enough compensation for arranging financing," Brobeck of CFA said. "And we want the fee disclosed."
Ending markups in the industry as a whole won't happen tomorrow. So if you are in the market for a car, go shopping for a loan too.
Before you go near a dealership, visit your bank or credit union and find out what interest rate you would qualify for given the car you want to buy. Get a preapproved offer if you can (that's what I always do). Even if you like the convenience of using dealer-arranged financing, at least get another rate quote so you'll know if you are being marked up at the dealership. Do this even if you know you've got a checkered credit history.
Don't be so desperate for a car that you put yourself in the position of being taken advantage of.
Write Michelle Singletary, Washington Post Writer's Group, 1150 15th St. NW, Washington, D.C. 20071.
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