People who plan to finance their next vehicle purchase with a car dealer loan should think twice. This approach could cost them hundreds of dollars more than obtaining financing elsewhere. The Center for Responsible
Lending conducted a study regarding dealer-provided auto loans and discovered some information that may surprise car buyers.
Whether they are providing regular or bad credit auto financing, car dealers are marking up rates on loans by an average of 2.47 percentage points. This practice adds $714 to a car loan. The finding is based on an analysis of 2009 used and new car loan data provided by 25 car financing companies, with 1.7 million accounts represented.
The estimated cost of the markups? An eye-popping $25.8 billion over the length of the car loans.
The largest markup, averaging 2.91 percentage points, was for a used car loan. Markups for new car loans averaged 1.01 percentage points. Bad credit auto financing and loans that featured lengthy terms or small amounts tended to have higher markups.
While some lenders cap the markup dealers can make on their loans, finance companies lending to subprime borrowers do not usually impose these caps.
Many car buyers are unaware that dealers markup the lender rate, so they unknowingly pay more money. Experts recommend that these individuals compare loan rates prior to financing a used or new car. Online lenders, credit unions, and banks usually offer competitive rates.
Buyers can also negotiate the financing rate offered by a dealer.
Yo-yo financing is another thing car buyers should be wary of because it is illegal. It involves being quoted an extremely low, subject-to-approval loan rate. After selling the car, the dealer informs the buyer that the loan was not approved.
The buyer must then return the car or agree to a higher vehicle financing interest rate.
