Most consumers know that vehicle financing is available at their local car dealership.
But many don't realize that it usually saves them money.
☛ Policy Brief:
Congress Urged to Preserve Consumer Discounts on Auto Credit ☚
Every day, consumers save money when they choose to finance through their local dealerships.
Because dealerships can shop a customer’s credit application to dozens of lenders, dealerships are usually able to offer their customers better interest rates than consumers can find on their own. Local dealerships can also discount interest rates for their customers to meet or beat a competing offer from another lender, such as a bank or credit union.
Consumers deserve every possible financial advantage when financing a car. Every consumer:
- Has the right to seek a great deal on their auto loan.
- Has the right to negotiate.
- Has the right to benefit from a local dealership’s ability to offer a discounted rate.
But Washington is jeopardizing your rights as a consumer, through efforts to end dealer discounting. This will make it harder for dealerships to provide competitive financing to their customers, and will raise the cost of auto loans for consumers.
When consumers are spending $30,000 or more for a new car, they should be able to save money by financing through local dealerships. No government institution should deny that to consumers. That’s not what Washington is supposed to do.
How Auto Financing Works
In 2016, consumers purchased 17.5 million new vehicles – an average of 48,000 every day. Eighty-five percent of those customers chose to finance their new car or truck through their local dealership.
Consumers can finance a vehicle in one of two ways. First, they can arrange the financing themselves through a bank or credit union. Or, they can have their local dealership arrange financing for them, which is called “dealer-assisted financing.”
Financing at the dealership benefits consumers in multiple ways. First, dealerships have access to dozens of lenders each through their software systems, and are able to send a customer’s credit application to all of them at once, creating competition in the process and
usually resulting in a great rate. Consumers don’t have access to many of these lending sources – for example, out of state banks, or finance companies owned by the auto manufacturers – which often provide promotional financing packages.
Secondly, dealers are often able to
discount rates further for their customers. Lenders compensate dealers for arranging financing on their behalf, but if a customer comes in with a lower rate from a competing finance source, dealers can cut their own compensation to “buy down” the rate on their customer’s behalf. This rate
discounting happens routinely at local dealerships, and is great for customers because they usually end up with a better rate than they can get on their own.
What Some in Washington Don't Understand
Despite the obvious benefits to consumers, the Consumer Financial Protection Bureau (CFPB) has
pressured auto lenders to make it difficult or impossible for dealers to cut their own compensation and discount rates for their customers at the point of sale.
overreach would give consumers fewer choices, limit competition in auto lending and, according to
an analysis by The Wall Street Journal, raise the cost of a four-year car loan for some consumers by nearly $600.
In 2015, Congress stepped in with a
bipartisan bill to bring transparency to the CFPB's efforts and preserve consumer discounts, and the legislation passed the U.S. House of Representatives by an overwhelming, bipartisan, and veto-proof majority.
Dealers Want to Protect Fair Credit and Preserve Competition
Discrimination is wrong – period – and local dealerships are fully committed to providing fair credit to their customers. To help promote fair credit in auto lending, thousands of local dealerships have adopted an optional
Fair Credit Compliance program that would ensure that dealership discounts are only made for legitimate business reasons, such as when a customer has a competing credit offer or a monthly budget constraint.
This program helps ensure fair credit while at the same time preserving the dealership financing discounts that so many consumers enjoy. In fact, the Fair Credit Compliance Policy & Program – developed by NADA, the National Association of Minority Automobile Dealers (NAMAD), and the American International Automobile Dealers Association (AIADA) – is modeled off of a
U.S. Department of Justice approach to ensure access to fair credit in auto financing. NADA has urged local dealerships to take up the program, and has urged the CFPB and U.S. Department of Justice to endorse it as official policy.
In the end, dealer-assisted financing benefits consumers by providing access to competitive auto loans and saving them money on vehicle purchases. Preserving that competitive, discounting system is 100-percent compatible with the nation’s fair credit laws. Working together, we can address fair credit risks while preserving a competitive auto financing system that benefits consumers every day.