Posted on Sun, Apr. 25, 2004 (no longer online)
Marked up interest rates on auto loans coming under fire
Associated Press
DETROIT - Marking up interest rates on vehicle loans - a practice that is legal and common - is coming under fire because by some estimates it costs unsuspecting consumers up to $1 billion a year.
Consumer advocates say markups are at best deceptive and at worst discriminatory. At least a dozen potential class-action lawsuits claim that some dealers, in cooperation with lenders, routinely boost loan rates for blacks and Hispanics.
"You could put your kids through college for what they're overcharging people on one new car," Rosemary Shahan, president of Consumers for Auto Reliability and Safety, told The Detroit News for a Sunday story.
Responding to the criticism, some automakers are imposing caps on markups and encouraging dealers to disclose more financing information to buyers.
But with auto financing accounting for a large chunk of profits, many dealers are resisting changes to lucrative loan markup practices. They argue the extra charges are legitimate payment for arranging financing for buyers.
"We're not in the position of defending the indefensible, and we're not going to be trying to do that," said Charley Smith, a New Mexico auto dealer and chairman of the National Automobile Dealers Association. But "the fact that we're providing a valuable service to customers is defensible."
Dealers portray themselves as brokers who can find lower interest rates on loans than individuals could on their own. Consumer groups counter that car buyers could actually beat a dealer rate if they shopped around.
Michael Waters, a 48-year-old Tennessee state worker, thought he was getting a deal when he purchased a Ford Contour for $11,000 for his wife. But the car ended up costing him almost twice that much.
Unbeknownst to Waters, who is black, the dealer doubled the interest rate approved by the lender to 24 percent. Waters has joined a class-action lawsuit against Ford Motor Credit Co. that claims he was discriminated against.
"I just want to see everybody treated equal," Waters said.
Dan Jarvis, a spokesman for Ford Motor Credit, declined to comment specifically about Waters' case. He said the finance company capped markups at 3 percentage points about two years ago. Waters was approved for his 24 percent loan in 2001.
"We don't buy contracts with markups higher than 3 percent, and that has been the practice for several years," Jarvis said.
Some states have predatory lending laws that limit interest rates, with markups, to 20 percent. Michigan's limit is 25 percent. But consumer groups such as the Consumer Federation of America and Public Citizen says laws provide buyers little protection.
Industry groups like NADA argue that consumers should know that the interest rate of an auto loan, like a vehicle's selling price, is negotiable. Some experts estimate the average dealer markup is between 1 and 3 percentage points.
"A lot of the misunderstanding comes from the lack of education on the part of customers," Smith said.
