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Flat Fees When Deciding On A Bad Credit Auto Loan |
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Most bad credit auto loan lenders such as Ford Motor Credit Co., Chrysler Financial or Chase Auto Finance allow the dealers to charge extra with caps of 2.5%-3%, guided by settlement
agreements in recent years with GMAC and Nissan. The lender with a higher cap gets more business from the dealer, who stands to gain more. Some big lending companies, such as Ford Credit, furnish forms which disclose that dealerships can receive compensation for arranging and processing bad credit auto loans. Interest rates by many car makers in Michigan are set by the discount plans they offer employees or their friends and relatives. However, consumer groups like CARS are insisting on flat and fair fees for processing and placing auto bad credit auto loans nationwide. They contend that allowing the dealers to decide variable extra fees without taking into account credit scores and other objective factors will lead to malpractices, thereby fleecing people who do not fully understand the car-buying process. Many experts feel that mere disclosure is inadequate as it might not be very discernible due to the fine print. About 65% of the dealers, who were interviewed in a recent study, felt that bad credit auto loan lenders would adopt flat fees within the next two years. The study, "The Bad Credit Auto Loan Lenders' Challenge: Moving from Automotive Finance Margins to Flat Fee Financing," is based on interviews with dealers, general managers and finance managers at more than 230 franchises nationwide. It has recommended that there should be a built-in charge, called an application fee, in the bad credit auto loan and it should be given to the dealer instead of the markup. Mark Rikess, president of the Rikess Group feels that interest rate markups should be done away with as caps generally have a leeway for discretionary markups and this makes dealers, banks and financing companies vulnerable to lawsuits. "The caps eliminate excessive charges--they don't eliminate discrimination. That's the problem; the liability stays out there," Rikess said. "They're going to get tired of getting sued and settling. Dealers interviewed in the Rikess report felt that a few unscrupulous people had brought a bad name to them and this had led to the intense scrutiny of the markups. Many TV exposes have also depicted this practice in an unfavorable light. Eliminating markups would definitely benefit the consumers but it would erode the dealership profits, depending upon the amount of the flat fees. Rikess feels that if the flat fees is settled in the $400 to $500 range, most dealerships won't suffer. There are only about 7% dealers who hanker after greater profits and they will be the ones who would suffer most if the markups are done away with or limited. On the other hand there are many dealers who feel that flat fees would be beneficial to their businesses and the auto retailing industry in many important ways. The survey showed that flat fees could make finance profits more steady from one transaction to the next, save time on administration, reduce legal exposure and improve the image of the industry and customer satisfaction. "The vast majority of automotive retailers maintain a very reasonable profit on interest rate markups of $400 per contract," Rikess said. "The problem is they don't earn their profit in a consistent manner. Many consumers pay less than the $400. A few pay much more. Sometimes income is generated almost exclusively in the finance department, rather than being balanced with profit from vehicle sales. That is why inconsistency, not profitability, is the real enemy." There are only a few lending companies that implement flat fees. Rikess predicts a domino effect will occur through the industry and they will become standard. He is apprehensive that if the lenders change their payment policies to dealers first, the dealers may stop selling their bad credit auto loans. Who will go first? |
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