Consumers interested in financing a car should inquire as to available rates on their own from at least one lender and not just trust or rely on the car dealer. This is because the dealer may not give you the best rate. Dealers are legally allowed to “mark up” the rate offered to the consumer and keep part of the finance charges.
There have been persistent complaints that dealer mark-ups are influenced by the race, ethnicity, and gender of the consumer. In December 2013, Ally Financial Inc. and Ally Bank (the new name of General Motors Acceptance Corporation) settled a fair-lending complaint filed by the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) (CFPB No. 2013-CFPB-0010; United States v. Ally Financial, Inc., 13cv15180 (E.D.Mich., Dec. 23, 2014)). The CFPB and DOJ alleged that Ally published a “buy rate” to dealers that reflected the minimum interest rate at which Ally would purchase a retail installment sales contract, but Ally would permit dealers discretion to mark up the buy rate to a higher rate in the retail installment contracts they entered into with auto buyers. Although Ally limited the dealer markup to 2 to 2.5 percent, it did not monitor whether impermissible discrimination occurred through the discretion that its lending policy and practice gave to dealers. The CFPB and DOJ estimated that over a period of thirty months, about 100,000 African American consumers were charged approximately 0.29 percent more in dealer markup than similarly situated white consumers, resulting in an average overpayment of $300 in interest over the life of the contract, and that about 125,000 Hispanic consumers were charged approximately 0.2 percent more in dealer markup than similarly situated white consumers, resulting in an average overpayment of over $200 in interest over the life of the contract. Ally agreed to pay $98 million in reimbursement and penalties.
In July 2015, American Honda Finance entered into a similar consent decree resolving similar allegations made by the CFPB and DOJ. According to the CFPB, Honda’s past practices resulted in thousands of African American, Hispanic, Asian, and Pacific Islander borrowers paying higher interest rates than white borrowers for their auto loans, regardless of their creditworthiness. As part of the consent order, Honda agreed to change its pricing and compensation system to substantially reduce dealer discretion and minimize the risks of discrimination, and it was ordered to pay $24 million in restitution to affected borrowers (http://www.consumerfinance.gov/newsroom/cfpb-and-doj-reach-resolution-with-honda-to-address-discriminatory-auto-loan-pricing).
Subsequently, BMO Harris (Chicago, Illinois) and BB&T (Winston-Salem, North Carolina) announced that they would abandon dealer markups and pay a flat fee of 3 percent to dealers for originating contracts. Most auto dealers and other lenders have resisted abandoning discretionary markups.
Understand what annual percentage rate (APR) you are being offered, and compare the APR offered by the dealer with those offered by other lenders, including not only car dealers but also banks and credit unions (whose rates do not include discretionary auto-dealer markups).
If the rate offered by the dealer is competitive, there is one major advantage to having the dealer arrange financing. If there is a serious problem with the transaction, such as fraud, odometer rollbacks, a seriously nonfunctioning car, or the failure of the dealer to pay off a trade-in, in the case of dealer-arranged financing—but not consumer-arranged financing—the consumer is entitled to assert the problem as a defense to the payment obligation. The Federal Trade Commission requires the retail installment contract or other financing obligation to include the following statement: “NOTICE: ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER” (16 C.F.R. §433.2, “Preservation of consumers’ claims and defenses, unfair or deceptive acts or practices”).
The right to assert claims against the finance company is an important advantage in litigation by consumers against the dealer. The finance company generally has a contractual right to require the dealer to repurchase paper under such circumstances, which tends to force the dealer to agree to a reasonable resolution.
However, unlike the case with some mortgages, you generally do not have a right to cancel a car purchase or financing transaction within three days. The only cases in which such a right is granted by federal law are (1) where a mortgage on your home is taken as security for a car loan (should not happen) or (2) the car dealer’s representatives visited you at home to obtain your signature without your visiting the dealer. Some used-car dealers may give a right to cancel a transaction within a specified period, but this is entirely a matter of contract. Make sure that any promise that you can cancel is in a signed writing.
TIP
To facilitate comparison shopping, you are entitled to a copy of the truth-in-lending disclosures at the time you sign.
WARNING
There is generally no right to cancel a vehicle purchase within three days or any other length of time.
Many people assume that such a right exists when it does not.
As noted in a previous chapter, car dealers often try to “sell” consumers deals based solely on the monthly payment. This results in consumers agreeing to increasingly lengthy credit terms. If the APR is high, the term of the credit may be extended out six or seven years, during which the consumer is “under water”—the amount owed exceeds the value of the car. In addition to abusive markups, negotiating based on the monthly payment also invites car dealers to “pack” the transaction with credit insurance, overpriced extended warranties, and similar products, claiming that they don’t increase the monthly payment. What they increase is the length of the credit obligation and the amount of finance charges paid. If the consumer trades the car in before the credit is paid off, the outstanding obligation is generally rolled over into the next loan.
One of the products dealers include in the transaction is “gap” protection. This is an agreement that if the car is totaled (destroyed or stolen) and insured, the consumer will not be held liable for the difference between the amount the insurance company pays and the credit obligation. See if your auto insurer will provide such coverage—if it does, it is cheaper than getting it from the dealer.
Look carefully at the payment schedule. See if there is a large “balloon” payment. If there is, make sure that you are able to pay it or have the right to refinance it.
Servicing of car loans presents some of the same problems as servicing of mortgages. For example, in May 2014, Consumer Portfolio Services, Inc., a major servicer of auto loans, entered into a consent order with the Federal Trade Commission, which alleged that it had collected money that consumers did not owe from over 120,000 persons. The consent order also permanently enjoined the lender from assessing or collecting any amount that is not (1) authorized and clearly disclosed by the loan agreement and not prohibited by law, (2) expressly permitted by law and not prohibited by the loan agreement, or (3) a reasonable fee for a specific service requested by a consumer after such fee is clearly disclosed and explicit consent is obtained. The lender was also prohibited from modifying the terms and conditions of a consumer’s loan agreement through a loan extension or otherwise without the consumer’s written “express informed consent” (United States v. Consumer Portfolio Services, Inc., 14cv819 (C.D.Cal., June 11, 2014)).
A recurrent problem with auto financing is the failure of car dealers to pay off the loan balance on trade-in vehicles. Some states require a payoff within a specified time after the dealer obtains possession; for example, Illinois requires twenty-one calendar days (Illinois 815 ILCS 505/2ZZ). Regardless, the failure of a dealer to comply is a problem for the consumer. If the dealer pays late, the late payments will show up on the consumer’s credit report. If the dealer fails to pay and the consumer arranged his or her own financing, the consumer may have no recourse. If the dealer fails to pay and the dealer arranged financing, the consumer may be entitled to recover from the finance company but probably has a lawsuit on his or her hands.
WARNING
If you can, pay off the loan on a trade-in vehicle yourself.
If at all possible, consumers should pay the existing loan off themselves prior to trading in the vehicle securing the loan.
Shop around for auto credit. Because car dealers often mark up the rate, get a quote from a bank or credit union. Do not choose on the basis of the monthly payment.