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Auto Tips Auto loan markups

If you walk into an auto dealership to get a car loan, you might be offered financing with an interest rate that is as much as 3 percent or more above what your credit score qualifies you for. The dealer doesnt have to tell you that you could get a lower rate elsewhere. And the practice, which is called finance-charge markup, is perfectly legal.

Heres how it works: The finance company used by the car dealership or bank runs your credit history and determines that you are eligible for a loan at a rate of 8 percent a year. But the dealer can tell you the rate is 11 percent.



On a $22,000, five-year loan, a 3 percent increase in the annual interest charge would add $1,935 to the cost of the loan. The dealer typically gets 50 to 100 percent of that amount; any leftover goes back to the lender.

The practice has been going on for decades at dealerships, where at least half of all cars are typically financed. Beginning in 1998, African-American and Hispanic borrowers started to file suits against nearly a dozen auto-financing companies alleging that they were two to three times more likely to be charged higher interest rates than other buyers. Nissan Motor Acceptance Corporation has settled with plaintiffs, and General Motors Acceptance Corporation is in the final stages of a settlement.

“People know the sticker price on a car is negotiable but dont realize they have the right to negotiate the interest rate being quoted,” says Stuart Rossman, director of litigation for the National Consumer Law Center, a nonprofit organization representing borrowers in 12 lawsuits against auto lenders, including six banks.

This year legislators in California and Illinois introduced auto-financing bills that would cap the markup and require dealers to disclose how much they earn on the loans. Also, as part of settlement agreements, some auto-financing companies have agreed to limit the interest-rate markup for every buyer to between 2 and 3 percent--still a horrendous amount to add to the price of a car.

how you can save

• Know your credit score. You can get your scores and credit reports for $39.95 at http://www.myfico.com/. Make sure that they contain no errors.

• Check on prevailing car loan rates by visiting www.bankrate.com.

• Investigate financing at a bank or credit union before you buy your car. Dont have the dealer call on your behalf or you may pay a markup.

• Pay cash if you can. Its the least expensive way to finance a car.

• Dont accept the dealers first financing offer; negotiate.

resource : autos.yahoo.com