Loans from auto dealers have a kickback that is similar to the one recently outlawed within the mortgage lending industry. It is called the dealer reserve and is the money that dealers receive for selling higher interest rate loans to car buyers, even if these consumers qualify for a lower interest rate.
This can end up costing consumers $1,200 to $1,700 over the life of the loan, higher for people with bad credit auto financing.
The fee equates to the auto dealer receiving $1,000 per hour for performing financial services. The Center for Responsible Lending (CRL) reported that this represented a $25.8 billion cost to 2009 auto buyers over the lifetime of their loans.
The report also links these markups to higher default and repossession rates, especially among subprime borrowers.
Predatory lending practices within the mortgage industry, like yield spread premiums, contributed to the economic crisis. Effective April 6, mortgage brokers are prohibited from receiving these premiums, which they once got to direct mortgage borrowers to costlier home loans.
Financial experts say that if the practice by car dealers increases the rate of delinquency, it should be prohibited.
The findings of the CRL were echoed by the Center For Public Integrity (CPI). According to a report from CPI, the industry also utilizes high-pressure tricks. One of these is characterized by offering a very low interest rate and then informing the car buyer that the financing fell through, hoping the person will love the car and accept a loan with the higher interest rate.
CPI also reports a trend in auto lending of selling securities that are bundled with subprime auto loans. This feeds into another trend of charging higher markups to credit vulnerable-consumers. Anyone in the market for a vehicle may want to consider financing other than that provided by a car dealer.
