WaPo Opinion on “Fair Play” in Auto Lending

The Washington Post ran an opinion piece on that gives insight on the interworking of the auto loan industry and how it often unfair:

When a consumer chooses in-house financing with an auto dealer, the dealer sends the customer’s financial information to a lender and is told the rate that the customer qualifies for. But it’s legal for the dealer to turn around and charge the customer a higher interest rate. You might qualify for a 5.9 percent interest rate, but if the dealer can get you to agree to a loan at 11 percent, the lender will kick back more than $1,000 to the dealership as pure profit. This discretionary markup of the interest rate allows auto dealers to arbitrarily increase their fees.

And a couple of steps on how the correct the problem:

To help assure that markups are reasonable, auto dealers should be required to engage the free market. If an auto-finance contract would earn the dealership profits over, say, $1,000, the dealership should be obliged to offer the consumer the option of having the loan auctioned on an open-access lending site such as Lending Tree. That way, bidders in the open market, and not sales agents in a back room, can determine the fair interest rate.

At a minimum, borrowers should be told how much their loan is being marked up, how much the dealer stands to profit and how that compares with average markup profit at that dealership. There’s no good reason dealerships should be allowed to shroud their loan profits. If customers were actually informed about the markup fees in their contracts, they could then decide whether to shop around for a different loan.