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Auto loans: greedy dealers' scams getting worse? Part one

[Apr 25, 2011.]


The Center for Responsible Lending (CRL) describes itself as "a nonprofit, nonpartisan research and policy organization dedicated to protecting home ownership and family wealth by working to eliminate abusive financial practices." For many years, one of those abusive financial practices that the CRL has campaigned to close down has been the dirty habit among many car dealerships of artificially inflating interest rates on auto loans in order to provide themselves with an extra source of fat profits.

This Rebuild.com blog covered the topic, reporting that dealer-inflated rates "cost American consumers $20 billion a year (no, that's not a typo: $20 billion each and every year) in inflated interest charges." Now it turns out that that figure is out of date. The CRL, in a report titled "Under the Hood: Auto Interest Rate Hikes Inflate Consumer Costs and Loan Losses," suggested the cost to consumers grew to $25.8 billion in 2009.

Auto loans scandal

But wait. Wasn't 2009 a terrible year for car sales? Yep. In fact, they were down around 20 percent from 2007. That may be why many dealers turned to padding interest rates to shore up their profits. In fact, on average, used car buyers who arranged dealer financing had their auto loans marked up by 2.91 percentage points, and are set to pay $780 more than they should through the lifetime of their loan.

According to ConsumerReports.org, "If you're relying on a dealer loan to finance your next car, you could end up paying hundreds of dollars more than if you financed elsewhere."

Rip-off auto loans hit vulnerable hardest

The new CRL report contained two other major findings:

  1. Dealers tend to target the vulnerable with this scam, and the markup tends to get higher the weaker your credit history.

  2. Unsurprisingly, perhaps, subprime victims of the rip-off are much more likely to default on auto loans that have been artificially inflated, and ultimately to have their cars repossessed.

That first point is particularly worrying. Subprime borrowers must expect to pay higher interest rates to reflect the increased credit risk they present, but many dealers pile higher markups on top of those higher rates. In fact, the increase in the amount of rate markup for those with lower FICO credit scores averaged 3.44 percent in 2009.

Higher rates charged by lenders plus higher markups creamed off by dealers leads inexorably to the second point. In December 2009, 1.5 out of every 1,000 consumers who arranged their own finance directly had their cars repossessed. That month, very nearly three out of every 1,000 consumers who had their loans arranged by dealers had the same traumatic experience.

Auto loans without the rip offs

There's an easy way to stop yourself being a victim of an unscrupulous dealer. Obtain competitive quotes for auto loans online or from your bank or credit union before you go anywhere near a dealer's lot. If the salesperson can beat your best quote, that's fair enough. But if he or she can't, you can still go with the cheapest financing option.

Marking up auto loans isn't the only dealer scam out there. And, next week, this blog will arm you with ways to protect yourself from others.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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