The Hidden Fees of Car Loans

Inside Subprime: July 15, 2019

By Jessica Easto

Certain auto dealers are using arbitrary hidden fees to boost their profits. In the past, auto dealers may have been in a better position to pad their profits by negotiating the sticker price on the lot, but legitimate auto websites have made consumers more aware of fair car values. Those negotiating tactics don’t work as well anymore, so many auto dealers have been—legally—using auto loans to make up the difference.

How do they do this? It all starts when you decide to finance your car purchase through the auto dealership, as opposed to getting an auto loan directly from a lender. Most people take the dealership route. Sixty-three percent of people who leased or financed vehicles in 2018 did so through their auto dealer (although that is down from 73 percent in 2017). When you go through the dealership, they go to the lender on your behalf, and the lender tells them the best interest rate you qualify for. However, that’s not the rate the auto dealer has to present to you. They can try to get you to agree to a higher rate, and when you do, they get a kickback of pure profit from the lender.

According to reports, if you qualify for a 5.9 percent interest rate but a dealer gets you to agree to 11 percent, the lender might give $1,000 directly to the auto dealer. In effect, the dealership increases its fees, although it is effectively concealed from borrower. And yes, this is completely legal.

One analysis showed that the average dealer markup per loan is $1,791. In 2003—more than 16 years ago when consumers did not have as much transparency into auto prices as they do today—one economist estimated that only 10 percent of Nissan loans were marked up in excess of $1,600. In other words, markup profits appear to be growing.

People of color, who have been historically discriminated against when it comes to pricing in the auto industry, are particularly vulnerable to these hidden car loan fees. In the past, dealers have charged people of color thousands more than their white customers for the same vehicles, doubling their profits in many cases. The same story appears to be playing out in the realm of hidden fees.

Both Honda and Toyota have settled lawsuits with the Consumer Financial Protection Bureau (CFPB) that alleged the companies charged higher interest rates to minority customers than they did to white customers. Honda settled for $24 million and Toyota for $21.9 million, though both companies denied the charges.

Meanwhile, the CFPB has been rolling back protections for consumers when it comes to predatory lending. In fact, last year the Senate overturned a rule that banned discriminatory auto lending fees on the basis of race. On the state level, there are only a few—such as California—that have placed caps on auto loan markups. For five-year auto loans, a standard term, dealerships in California can mark up loans only by 2.5 percent at max.

Until more protections are in place for consumers, consider shopping around for your auto loan before settling for the dealer’s terms.

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