[Mike from California] Does a car dealer have to provide you with the lowest interest rate?
Dear Mike:
Car dealers have no legal requirement to supply you with the best loan offer that they have obtained on your behalf. They may sit on an approved loan offer that has a better rate and instead steer you into a loan with a higher interest rate.
It may seem counter-intuitive for them to increase your borrowing costs, since that could cause you to lose interest in the car. However, they often offset the higher borrowing costs by extending the term another 12 months. That way, you don’t seem to care since the monthly payment is still similar.
Car dealers make a decent profit on car sales, but it is the financing of these vehicles which really pads their wallets. Lenders will provide incentives to dealers to compensate them for brokering the loan. Lenders who charge much higher interest rates will often provide larger kickbacks to the dealer in order to help them compete against lower interest lenders.
These kickbacks are completely legal. The industry term for kickback is “yield spread premium.”
The use of kickbacks to increase borrowing costs for consumers was legal for both mortgage brokers and car dealers. Following the mortgage crisis that began in 2008, new lending requirements prohibited mortgage brokers from steering borrowers into higher interest loans.
Consumer advocates wanted car dealers to also be restricted in a similar manner. However, their lobbyists ultimately prevailed in excluding car dealers from the new restrictions.
As a result, car dealers can hide the better quotes from you even though they were sourced from your credit application. You give permission for the dealer to run your credit, yet they have the legal right to deny you certain quotes that resulted from that credit check.
You can protect yourself by walking out of any negotiation in which you suspect that the finance manager is not being honest. Most consumer advocates will tell you that obtaining your own financing through a credit union or community bank is often cheaper and less hectic than trying to qualify through a dealer’s finance manager.
Tags: kickbacks, yield spread premium