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Minority car buyers: Beware of extra financing
markup
By • Bankrate.com
 Minority
car buyers need to take special care to secure fair financing. According
to two federal lawsuits, car dealers and finance companies charge
higher interest rates to minority buyers.
"If you compare blacks and whites with the same
credit risk, blacks pay more," says Gary Klein, one of a team of
attorneys representing black car buyers in the lawsuits.
The defendants say that they simply charge higher
interest to people with poor credit, and that minority customers
tend to have poorer credit. They say the lawsuits were filed by
people who don't understand the nuances of car financing.
Standard practice
Both sides agree on one thing: African-Americans and other racial
minorities tend to pay higher interest rates for car purchases.
No matter what color your skin is, you'd better shop around for
car financing -- and that goes double if you're black.
"It is standard practice, unfortunately, at
many dealerships and many financing companies that they can make
more money on blacks and other minorities," says Remar Sutton, author
of Don't
Get Taken Every Time: The Insider's Guide to Buying or Leasing Your
Next Car or Truck.
Sutton says minorities are preyed upon for two
reasons: First, because of habit or tradition; second, because "many
minorities, and particularly poorer minorities, have less experience
in negotiating." He is an expert witness in one of the lawsuits.
The two class-action lawsuits were filed in
federal court in Nashville. One was filed against General Motors
Acceptance Corp. on behalf of car buyers in Tennessee, and the other
was filed against Nissan Motors Acceptance Corp. on behalf of car
buyers nationwide. The lawsuits accuse the finance companies of
setting up a "discriminatory kickback system that materially hurt
African-American car buyers," says Klein, who is involved with the
cases as senior attorney for the National Consumer Law Center in
Boston.
Making a markup
At issue is something known as "dealer markup." When you finance
a car through a dealer, the seller shops (on your behalf) for lenders.
Based on your credit history and the car you're buying, banks and
finance companies will give the dealer a "buy rate" -- the minimum
interest rate that the lender will accept.
But dealers usually don't offer you the buy
rate. Instead, they'll quote you a higher interest rate. That's
the dealer markup. The dealer either pockets the markup or splits
it with the lender.
Here's how it works. Let's say you've selected
a new car and you have a good credit history. While you cool your
heels in the salesman's cubicle, the finance manager closes his
office door, works the phone and finds a bank that is willing to
lend the money at 9 percent. That's the buy rate. Then the finance
manager walks out of his office and delivers the good news: He can
lend you the money at 13 percent.
The 4 percent difference is the markup. On a
three-year, $10,000 loan, this markup would amount to $681.84: That's
how much more you would pay over the life of the loan at 13 percent
instead of 9 percent. The lender gives all or some of the markup
to the dealer. Dealers regard the money as a finder's fee -- compensation
for making phone calls and doing paperwork.
The markup usually is higher for black customers
than for white customers, according to the plaintiffs in the Nashville
lawsuits. Debby Lindsey, a business professor at Howard University,
analyzed thousands of loans from GMAC and NMAC and concluded that
blacks ended up much more in dealer markup than whites paid. For
example, in a sample of 9,400 NMAC borrowers of all races, whites
paid an average of $508 in markup, while blacks paid an average
of $970. For a sample of 4,900 GMAC customers, the figures were:
$643 markup for whites, $959 markup for blacks.
Go shopping, says NADA
The finance companies say that the higher interest rates reflect
that these black buyers were higher credit risks. And they point
out that dealers, not the finance companies, largely benefit from
markup.
The National Automobile Dealers Association
is not a defendant in the lawsuits, but it has entered the fray
by issuing a statement defending the practice of dealer markups.
NADA says that dealers are retailers of auto loans and banks are
wholesalers, so dealers are entitled to sell loans at a profit.
The association says that no two transactions are the same, and
that credit rating is just one factor determining an interest rate,
along with vehicle price, demand for the vehicle, down payment and
trade-in value.
Above all, NADA says, "Negotiating credit is
no different than negotiating the price of a house or the costs
of remodeling a bathroom or kitchen. The answer is not more regulation;
the answer is comparison shopping."
Assumptions can be costly
-- for you
Sutton agrees that all car buyers should go comparison-shopping for
auto loans.
"Never assume that the rate you get from the
dealership, or a financing company related to a dealership, is the
best rate," Sutton says. The best deals usually are available from
credit unions, he adds. Savvy car shoppers should check on their
own with banks and finance companies.
It's best to do this after you have negotiated
a price on the car, because then you know how much you need to borrow,
Sutton says. Then tell the dealer to find the best rate, and try
to persuade the dealer to print out the proposed financing contract.
"Virtually no dealership will do that, which
shows that they're not the cheapest," Sutton says.
Nevertheless, find out the interest rate and
the total amount of interest that would be paid if you got financing
through the dealer, and try to find a credit union or bank that
can offer better terms. Most of the time, you can, Sutton says.
Klein has more succinct advice.
"Car buyers should never allow dealers to arrange
their financing," he says. "Consumers will almost always do better
if they look for a loan on their own through a reputable lender."
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