Buyer beware. Adding a markup to finance rates is a standard practice in the auto industry. It is simply another profit center for dealerships. Not all dealers add this markup, but as a consumer you must be aware of this practice. Ensuring that you are receiving the best finance rate possible is simple, but the onus is entirely on you.
Dealerships work with a vast array of lending institutions and can get all types of credit approved. Due to their network, dealers can typically offer highly competitive rates that you may not find elsewhere. Considering dealer financing is a wise choice, but as a consumer you must understand your credit score and collect a number of lending quotes prior to entering negotiations. Walking into the dealership with an understanding of your lending rate will give you another point of negotiation and can save you thousands over the life of your loan. For example, a dealer secures financing for a 60 month $20k loan at 3.5%. They pass that financing on to the consumer at 5.5% (they do not disclose the markup because that is not required). While a difference of 2% does not seem like much it earns the dealer another $1100 in profit. That is an easy $1100 savings for the consumer assuming that they have done their homework regarding interest rates. Finance rates themselves aren’t negotiable. However, different lenders offer different rates. If you enter the negotiations with a finance rate from your own lender and ask the dealer for a better rate in order to close the deal, you will find that in most cases they will be able to earn your business.
All of the above is applicable to leasing as well. However, it is even easier for a dealer to markup the annual percentage rate or money factor on a lease because dealers recognize that most consumers don’t understand how financing works with leases. On top of that those lending rates aren’t as easily accessible as a call to your bank. When you enter a lease the lending rate is either given as a percentage (6% for example) or as a small number to the right of the decimal (.0025 equivalent money factor of 6% APR). If you as a consumer have not done your due diligence you have to take the dealer’s word that they are offering you the best rate. In the game of sales one party is pitted against the other. Taking the opponents word is not a smart play. This APR or money factor is commonly marked-up and can cost the consumer hundreds to thousands of dollars in inflated interest. For example, without explaining how lease payments are calculated the following scenario is quite common. A client recently asked me to review a lease that they had negotiated for themselves. This client was given an APR of 8% (.00333 money factor equivalent) on their 39 month lease when in fact their credit score had qualified them for an APR of 5.4% (.00226 money factor equivalent). While the difference between those numbers may seem small and insignificant this markup cost the client an additional $1326 ($34/mo.) over the term of the lease. This is an easy catch if you have done your homework.
The only way to ensure that you are receiving the best finance rate is to put in the time and effort and shop your finance rate on your own. If it is a lease, commit to determining the APR or money factor from a source other than the dealer with whom you are negotiating. That bit of effort can save you thousands of $$.
