Auto Dealer Financing Hides Higher Costs, Raises Repossession Rates

Dealer markups cost buyers $25.8 billion, up 24% since 2007

DURHAM, N.C., April 19, 2011 /PRNewswire-USNewswire/ -- Consumers who financed a car through a dealership in 2009 will pay more than $25.8 billion in extra interest over the lives of their loans because of dealer interest rate markups, according to new research by the Center for Responsible Lending (CRL). This is an increase of 24 percent from 2007.  CRL also found that undisclosed markups increase the odds that a subprime borrower will default by 12 percent and odds that he or she will end up having their car repossessed by 33 percent.

The report, "Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses," examines the opaque world of hidden rate markups, the interest rate car dealers can add to car loans beyond the rate consumers qualify for based on their credit history.  Auto dealers claim that markups are compensation for their work in arranging financing, but this suggests they are billing car buyers $952 to $1,587 per hour for this service.  (For the full report and a state-by-state breakdown of overcharges, see http://www.responsiblelending.org/other-consumer-loans/auto-financing/research-analysis/under-the-hood-dealer-rate-markups.html)

CRL's report also finds that dealers are more likely to charge higher markups to consumers with weaker credit compared to those with better credit. Loans made in connection with finance companies that focus on subprime borrowers may have an additional undisclosed 5 percent kickback included by the dealer.

"Even for consumers who financed a vehicle through a dealer with a self-imposed cap of 2.5 percent on hidden markups," says CRL research analyst Delvin Davis, "the added interest on that loan can be nearly $1700 for a new vehicle and over $1200 for a used one."  

The report analyzed bonds backed by loans carrying these hidden markups, survey data from 25 auto-finance companies with a combined 1.7 million accounts, and other industry information. It is the first to link dealer markups to higher rates of default and repossession, particularly among subprime borrowers. "The lack of transparency in dealer-financed loans makes it impossible for consumers to know the real cost of their loans and whether the service of dealer financing is worth the cost," said Chris Kukla, Senior Counsel for Government Affairs of CRL. "Divorcing dealer compensation from the interest rate of car loans and disclosing the cost of financing is the only way we can ensure a transparent and fair market."

Auto dealer interest rate markups are similar to the "yield spread premiums" common in the subprime mortgage market and now banned by the Federal Reserve.  

About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.

SOURCE Center for Responsible Lending