Bad Credit Auto Loan Financing for California |
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Many lawmakers and regulators in several states are debating over the issue of how much a dealer should get for his services in arranging the right bad credit auto loan and for doing the necessary paperwork. This followed the revelation that dealers secretly, and sometimes dramatically, boost the interest rates on bad credit auto loans they arrange for consumers, especially minority buyers. Critics are demanding that there should be a capping for such mark-ups and that the dealers should charge a flat fee from everyone for finding and processing a bad credit auto loan. At present, when a customer chooses a vehicle, the dealer's finance manager scouts around for the cheapest interest rate available from a variety of financial institutions. If he gets the best deal at 5%, he jacks it up by 3% (which is called the markup) and sells the customer an 8% bad credit auto loan. This markup, over the period of the loan, works out to quite a substantial amount of money but the dealers do not consider it to be high for the services they render in locating a good competitive bad credit auto loan and processing the paperwork. They also point out that bad credit auto loan brokers use markups with other types of bad credit auto loans, such as mortgages. The National Automobile Dealers Association, based in McLean, VA, however, contends that dealers should be compensated for obtaining finance and it has asked its 20,000 members to propose to their customers to negotiate their own finance rates and they should only retain a part of the finance charges as compensation for processing and placing the bad credit auto loan. Consumer groups feel that although this is a good start, the dealers would still charge markups at their discretion, which would be completely unrelated to the customer's creditworthiness. Bad Credit Auto Loans: The Markups The dealers' markups are a significant part of their earnings. Sometimes these can be as high as 22.75% on top of buy rates, which leave some of the customers poorer by tens of thousands of dollars. Interestingly, the markups in some extreme cases may be as high as the value of the vehicle being purchased. This has been revealed by lawsuits filed in recent years against financing companies. During the course of these lawsuits it has also been revealed that minority customers and people who are ignorant about financing are the most likely victims of high mark ups as they are unable to negotiate interest rates on their own. The Consumer Federation of America says that minorities are charged much higher mark ups than whites and the total value of undisclosed finance markup charges for minorities could be in the range of $ 1 billion annually. The lawsuits have also revealed that some unsuspecting customers have been charged a total of 9.15% interest rate by the dealer, whereas the Financial Corp. had approved a 5.74% interest rate, tacking on a 3.41% markup. These customers naturally feel that they are being taken for a ride. Provoked by such stories, consumer advocates are trying to determine how much is reasonable for an auto dealer to collect in return for locating a lender and processing a bad credit auto loan. Most states are now trying to limit the amount dealers can collect, either by fixing flat fees or establishing percentage markups. They are also demanding that dealers should either disclose to the customers exactly the amount of money they are making from the deal or simply telling them that they might be paid for arranging financing. New laws are being proposed in California, New York, Illinois and Louisiana but not in Michigan as yet. As dealers represent both the auto buyer and the lending institutions, their interests may seem to be clashing but essentially they are most interested in finding the lowest bank rate so they can mark up the bad credit auto loan and take a cut. |
