NEW YORK (MainStreet) — Any time you go to buy a car – new or used – when you’re done haggling you know just what your new baby (and all the trimmings you chose) will cost.
But if you’re borrowing from the dealer to pay for that baby, there’s a good chance you’ll pay hundreds more than you should. Hidden dealer markups can lift your interest rate higher than you ever saw on paper, according to a new study, which could lead to your car being repossessed if you’re not careful.
“This interest rate markup, also known as ‘dealer reserve’ or ‘dealer participation,’ is described by dealers as the way they are compensated for time spent putting a financing deal together,” says the Center for Responsible Lending, or CRL, a consumer advocacy group. “However, since consumers usually do not know what they can actually qualify for, the markup is often a hidden cost to the consumer.”
The CRL analyzed 2009 loan data from asset-backed securities covering 1.7 million loans at 25 auto-finance companies and found that buyers who financed through car dealers pay more than $25.8 billion in rate markups over the lives of their loans.
On a 60-month new-car loan for $24,500, a typical markup raised the rate to 6.4% when a consumer qualified for a loan at 4%, with the markup adding $1,690 to the interest over the life of the loan, the CRL said.
In 2009, the typical dealer loan added 2.47 percentage points to the lowest rate for which the buyer could qualify, adding an average of $714 to the interest charges over the life of the loan. Markups were heaviest on used-car loans, adding 2.91 percentage points to the loan rate, compared to 1.01 on new-car loans.
The study also found higher markups for borrowers with weaker credit. Markups tended to be higher for loans with longer terms, such as five years instead of three, and they were higher on smaller loans than on big ones. Because the loan process is highly automated and usually can be completed while the borrower waits, markups effectively bill consumers for this service at an hourly rate of $952 to $1,587, the group said.
Perhaps unsurprisingly, since these charges boost monthly payments they increase the chances that a borrower will default and lose the vehicle, the CRL said. Indeed, the study found that dealer loans have about twice the repossession rate of loans from banks and other lenders.
The moral of the story is obvious: Shop around for a loan. Use the sbup auto loan search tool to find a good loan and compare rates with the sbup Auto Loan Calculator.
Also check your credit history for any errors that could make it hard to get the best rate possible.
Finally, consider steps to minimize interest charges, such as putting more down to borrow less, or borrowing for a shorter period.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.