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Study Auto loan markups cost 25.8 billion

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WASHINGTON (4/27/11)--American consumers financing a new or used vehicle through a dealership will drive off the lot and pay more than $25.8 billion in hidden interest rate markups over the lives of their loans, according to a study released April 19 by Washington-based Center for Responsible Lending (CRL). Their out-of-pocket cost is not insignificant, averaging $714 per consumer, with an average rate markup of 2.47 percentage points. States with the highest markup costs are California ($2.6 billion), Texas ($2.2 billion), New York ($1.6 billion), Florida ($1.5 billion), and Pennsylvania ($1.2 billion), with Alaska having the lowest ($54 million). Also known as “dealer reserve” or “dealer participation,” hidden interest-rate markups are described by dealers as how they compensate for the time they spend putting a financing deal together. It’s considered “hidden” because consumers usually don’t know what interest rate they actually qualify for. According to industry data, the average customer spends 45 minutes with the finance and insurance department, or only 27 minutes if taking a test drive, so a markup of $714 translates to $952 to $1,587 per hour just to finance the vehicle. The Consumer Federation of America, National Association of Consumer Advocates, and CRL offer these suggestions:
* Run your credit report. Do this before you visit the dealership. Visit or call 877-322-8228. Get one free report a year from Experian, Equifax, and TransUnion. * Buy your credit score. Order one individual score (FICO Standard) directly from FICO for $15.95 at myfico/com/Products/Products.aspx. Here’s a tip: Call FICO at 800-319-4433 and ask a customer service representative for the promotion code to get your score for $14.95. Normal business hours are 8 a.m. to 7 p.m. (CST) Monday through Friday, and 9 a.m. to 6 p.m. Saturdays. If your score is low, take steps to improve it before you apply for a loan. * Be skeptical of ads for “0%” loans. You’ll likely be switched to a higher rate, or find it difficult to negotiate on the price of the vehicle. * Research prices. Check price information at For used cars, visit * Line up financing at the credit union. Get prequalified for a loan before you shop for a vehicle. You don’t have to accept financing from a dealer; the sales and finance people may tell you they can provide the best financing, but kickbacks and markups add to the cost you’ll pay.
If you have a complaint concerning car dealership financing, contact the Federal Trade Commission at or call 877-FTC-HELP (382-4357). For more information, click on “Calculator: When a Rebate is Better than a Low-Rate Auto Loan” in Home & Family Finance Resource Center.