Can dealerships mark up interest rates?

Dealership profit margins can impact the cost of purchasing your vehicle and your auto loan in a number of ways. One thing your broker may have some control over in your loan is your interest rate. Let’s see how dealers can mark up your interest rate and what you can do about it.

Why do dealers mark up interest rates? When you are approved for an auto loan, your lender sets the interest rate for your loan. However, in exchange for arranging financing, these finance companies and captive lenders give the dealership some leeway when it comes to your interest rate. A small markup on your interest rate usually gives the dealership a small profit for their services.

How does an interest rate hike affect you? This mark-up may be a few percentage points or only 1% higher than the rate indicated by the lender. Many automakers cap the amount a dealer is allowed to mark up your rates, but the amount varies. The rate given by the lender is called the purchase rate and the rate given to you is called a contract rate. Most borrowers never know that there is a markup or difference between these rates. Here is an example of the difference you would pay on a $15,000 loan for 60 months.

If your buy rate is 3% and the dealer gives you a contract rate of 4%, you pay $403 more. This small profit would go to the dealer. The higher your interest rate, or the greater the difference, the more you pay. This same loan with a purchase rate of 9% and a contract rate of 11% would cost $885 more.

It’s important to be your own advocate when shopping for a car loan, always ask if the rates you’re offered are the lowest, and don’t forget to rate the shop.

Rate shopping can be more difficult for some buyers, especially if they have bad credit. With poor credit, you’re probably already seeing higher interest rates, so a markup may be harder to swallow.

Know what you can negotiate. Since mark-ups can impact already high interest rates for borrowers with bad credit, it’s important to know what you have leeway on. Generally, you can negotiate the following:

  • Vehicle sale price – The price at which you can buy the car.
  • Your contract rate – The interest rate and APR are given to you by the dealer.
  • The term of your loan – How long you have to repay the loan.
  • Your deposit amount – How much you need to pay upfront.
  • Your trade-in amount – How much money you get for your old vehicle, if any.
  • Dealer fees – Fees for setting up the loan and paperwork, such as dealer doc fees.
  • Dealer Add-ons – Additional services such as GAP coverage and extended warranties.
  • Optional Services – Extras such as tire sets, fabric protection and VIN engraving.

There’s no guarantee on how much you’ll save, but you never know until you try.

Car margins and prices. Dealership profit margins may be hard to accept right now, especially since vehicle prices are already high. Markups are also common on the sale price of the vehicle, so be sure to pay attention to the MSRP on the window and ask for a lower price, if necessary. Remember that vehicle pricing and markups are happening across the board due to current industry conditions such as supply chain issues, so you may need to act quickly to get the car that you want.

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