In two-thirds of all surveys, car buyers report that they “hate” the negotiation process. If you are about to negotiate a new car purchase don’t worry. Most research shows that the average mark-up for a low end car is 10 percent and 25 percent for a luxury car. The time when most car buyers begin negotiation is at the “back end” of a deal. Below are a few tips on how to avoid the “dealer mark-up”:
- Know the dealer invoice price. The key to avoiding the dealers mark-up is to know what the dealer paid the manufacturer. Again, check a resource like Consumers Reports Annual Buying Guide. A resource like this will often list the “dealers invoice” for the car and for options.
- Know that dealer invoice can sometimes not tell the whole story. “Holdbacks” and other credits that the dealer receives from the manufacturer almost always reduce the dealer’s true cost below the amount of the invoice.
- Popularity has a price. High demand means higher price. If you want the most popular car of the year, be prepared to pay a little more. The upside is that a popular car may reap you a higher price when the time comes to sell or trade the vehicle.
- Don’t be fooled into thinking that a car sold to you at “invoice” means that the car is being sold to you at dealer’s costs. There is almost always still room to bargain.
- Time your purchase. The best time to purchase is at the end of the month when dealers want to eke out a few more sales to finish a month off strong, as well as during the holidays. Dealers spend a lot of money to advertise holiday specials and will want to assure that they cover this spending.
- Don’t mention a trade until the sales price has been negotiated.
- Never tell the salesperson what you are willing or can afford in monthly payments.
- Stand firm. Remember, you’ve done your homework. Only raise your offers by $100 or $200. Be patient.
Automotive Financing Markups
The Hidden Cost of Purchasing a Vehicle
What is an Automotive Finance Markup?
Automotive loan markups occur when finance companies allow car dealers to subjectively increase the interest rate on auto loans above the buy rate determined by the creditworthiness of borrowers. The markup is then shared by the dealers and the finance companies. A growing body of evidence has proved that hundreds of thousands of consumers, perhaps millions, have trusted auto finance companies and car dealers to charge fair and reasonable interest rates only to be subjected to overcharges that in the past have been as high as five percentage points. That may not sound like much but a report released by the Consumer Federation of America, the National Council of La Raza and the Rainbow-PUSH Coalition estimated that these overcharges cost consumers at least $1 billion annually.
Implications of Automotive Finance Markups
Because an automotive finance markup is hidden from the consumer the practice can be and has been ripe for abuse. Consumers do not know that they are paying interest rates that are set arbitrarily higher than their creditworthiness demands. Or, that the extra money is being split by dealers and finance companies. In other words, automotive finance markups are hidden surcharges which are not applied to the direct cost of the consumer’s loan. All consumers are potential victims of hidden automotive finance markups but the discriminatory impact of the practice has been well documented.
Discriminatory Practices
At this time, it is impossible to determine the total impact of hidden automotive finance markups on all car buyers. However data is available that shows tens of millions of dollars of markup costs from three auto finance companies: Nissan Motors Acceptance Corporation (NMAC), General Motors Acceptance Corporation (GMAC) and Primus Automotive Financial Services, Inc. (PRIMUS), a division of Ford.
Studies of these lenders prepared by Dr. Mark Cohen of Vanderbilt University, filed in relation to lawsuits alleging racial discrimination in the markup, examine the impact of the hidden automotive finance markup on White, African-American and Hispanic borrowers. It should be noted that NMAC, GMAC and AHFC have all settled private litigation alleging that the mark-ups charged by dealers on their loans led to higher mark-ups charged to Black and Hispanic auto buyers than to White auto buyers.
The national trend of racial disparities and consumer costs caused by the hidden automotive finance markup is well documented. For example, a study by Dr. Cohen filed in January 2004, in relation to a lawsuit alleging discrimination in the markup practice by Ford Motor Credit Company, shows that 30.9% of white customers received the markup, versus 48.5% of African-Americans. African-American borrowers on average pay more than 2 times the amount in subjective markup compared to whites: $684 versus $337, a difference of $347.
In another example, the September 2004 study by Dr. Cohen of nation-wide lending by PRIMUS, it was found that 40.2 percent of White borrowers were charged a subjective markup, compared to 57.9 percent of Hispanic borrowers and 62.8 percent of African-American borrowers. The average markup was $715 for Hispanic borrowers, compared to $464 for White customers, a difference of $251. African-Americans paid on average $862 in the markup compared to $475 for Whites, a difference of $387. Other findings of the PRIMUS study include:
The 219,278 PRIMUS borrowers who were identified as either being African-American or White were charged a total of $118 million in subjective markup. Of that total, $30.9 million, or 26.1% was charged to African-Americans, who make up only 16.3% of this customer base.
3,198 PRIMUS customers in the race-coded sample were charged more than $3,000 in subjective markup. African-Americans make up 31.6% of those who were charged more than $3,000, although they again represent only 16.3% of the borrower pool.
Subjective markups can cost certain customers thousands of dollars. For example, one African-American customer in Florida financed a Toyota Sequoia through PRIMUS and borrowed $36,718 for 60 months. This customer had a tier 2 credit rating and should have qualified for a loan rate of 11.7%. The loan was marked up by 5 percentage points to 16.7%. As a result, monthly payments were nearly $100 more per month than they would have been if the loan had not been marked up. The total subjective markup over the life of this loan was $5,863.80.
The average subjective markup for African-Americans was $930 in 2001; $872 in 2002; $699 in 2003; and $498 in 2004. The average subjective markup for Whites was $542 in 2001; $445 in 2002; $397 in 2003; and $343 in 2004. This decline in mark ups appears to reflect PRIMUS lowering its cap on allowable markup to three percentage points in 2003, but the numbers also show that racial disparities in the markup remain.
The report examined records of 219,278 PRIMUS customers over the period, January 2001 to February 2004.
Remedies
In response to litigation and requests by consumer groups, state attorneys general, and even industry experts to end the markups, several auto finance companies have revised their lending practices.
For example, Nissan Motors Acceptance Corporation settled a lawsuit alleging discrimination by limiting the markup to 3 percentage points and 2 percent for longer-term finance agreements and 2 percent for used vehicles.
General Motors Acceptance Corporation imposed a 2.5 percentage point cap on the dealer markup as a result of a settlement negotiated in a lawsuit alleging discrimination in the markup.
Ford Motor Credit Corporation subsequently self-imposed a lower cap of 2.5 percentage points following findings of discrimination and consumer gouging in FMCC auto finance markup practices.
However, the PRIMUS report presents evidence that suggests caps do not end racial disparities and the potential for high consumer costs.
During the 2001 to 2004 time period examined by the PRIMUS report, PRIMUS self-imposed a lowering of a cap on the markup from 5 percent to 3 percent on standard term loans (those of 60 months or less), effective March 1, 2003. But throughout the entire 2001-2004 period, African-Americans were consistently charged a higher markup than Whites at statistically significant levels regardless of which credit tier they fall under.
In other words, while the lower markup cap has the effect of reducing the disparity between White and African-American markups, it does not end the disparity altogether and still leaves the possibility of high dollar markups for all consumers.
Moreover, the imposition of markup caps does not necessarily prevent consumer from continuing to pay substantial markup fees. In one example of a car buyer in the PRIMUS report, a markup of 2.25 percent on a 72 month loan of $46,791 yielded a $4,030 markup; the buy rate for this borrower was 11.00 percent and the APR after the markup was 13.25 percent.
Reforming the practice of the markup has been an important step, but given the continued high fees that even 2.5 and 2.0 percent markups can yield, more remains to be done.
Many consumer education efforts have been undertaken and funded by the auto loan finance companies as part of legal settlements, but consumer groups still object to auto loan markups in principle.
The executive director of the Consumer Federation of America has said that creditworthiness is entirely taken into account by the buy rate at which lenders are prepared to extend credit to car buyers. Dealers should be permitted to charge lenders a reasonable processing fee but not to arbitrarily mark up loan rates above the buy rates and to do so without disclosing these markups.
Dealers ought to be fairly compensated for helping consumers with their credit application. However, the current system is not the way to do this. By tacking on points to the annually compounded interest rate of a loan, dealers arbitrarily make more money based upon the amount of the loan and the length of its term. This has no relation to the amount of effort required to help with loan processing.
Consumer groups have suggested the right answer is compensating dealers with a flat fee that is disclosed at the time of the loan. Some have suggested a percentage markup could also work if it is disclosed and is a one time payment based on the loan amount.
The automobile industry has in its power to end the current practice of the finance markup charge, which would eliminate discrimination and improve fairness in lending.
How to Avoid Automotive Finance Markups
Support Organizations Where Victims Can Get Help
Settlements
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