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Car loan mark-ups and ‘communities of color’

Before getting caught up in new car fever, consumers would be well-served to learn more about financing cars before buying one. by Charlene Crowell
NNPA News Service

For auto dealers, the spring season signals the time when customers begin to shop lots and visit showrooms more often. Friendly salespeople beckon shoppers to see new cars, learn about vehicle options and more.

But, before getting caught up in new car fever, consumers would be well-served to learn more about financing cars before buying one. “Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses,” the Center for Responsible Lending’s newest research report on auto financing, finds that consumers pay more than $25.8 billion in interest rate markups over the lives of their loans. Beyond higher mark-ups, poor credit ratings can lock consumers into finance rates so high that repossessions become the norm, rather than the exception.

According to the report, “Repossession rates for dealer-financing have been nearly double the rates of direct auto lending in recent history.”

Through an analysis of 25 auto finance companies that together accounted for 1.7 million vehicle finance accounts by the end of 2009, CRL discovered that although vehicle sales declined by 20 percent from 2007 to 2009, the total markup volume during this same period grew 24 percent from $20.8 billion in 2007.

CRL identified and ranked each of the 50 states in terms of dealer markups. The five states with the highest dealer markups are: California ($2.6B), Texas ($2.18B), New York ($1.58B), Florida ($1.49B) and Pennsylvania ($1.2B).

Tennessee’s total was $459 million, ranking the state at No. 20. Other totals and rankings: Arkansas – $227 million, 32; Mississippi – $181 million, 34.

Vehicle markup is sometimes termed “dealer reserve” or “dealer participation”. Regardless of which term used, it is the way dealers compensate for time spent in putting a financing deal together.  As many consumers are unaware as to how much financing they could actually qualify for, or that the dealer is charging them extra for the service, the markup is often a hidden cost to the consumer.

Using 2009 auto industry data, CRL found the average rate markup was $714 overall, some markups totaled nearly $1,700 in extra interest payments during the life of a car loan. Further, larger markups occurred on longer-term loans and loans for used vehicles.

This new report follows up on developments from earlier research that showed that more than 54 percent of African-Americans are charged dealer kickbacks, compared to only 31 percent for white customers resulting in $20 billion in overcharges each year.  Since that time, a large but limited class action settlement addressed those disparities.  According to CRL now is a critical time to keep an eye on dealer practices to ensure that the recent history of racial targeting does not repeat itself.

For most households, transportation costs are second only to that of housing.

(To view the full ranking for all 50 states, go to: http://www.responsiblelending.org/other-consumer-loans/auto-financing/tools-resources/rate-markup-volume-by-state.html.)

(Charlene Crowell is the Center for Responsible Lending’s communications manager for state policy and outreach. She can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it. .)  

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