With Congress rolling back rules that curbed discriminatory auto-loan markups, getting preapproved before you reach the dealership matters more than ever. Here’s how to protect yourself and lock in the lowest rate.
Getting preapproved for an auto loan before you head to the car lot could soon be more important than ever.
1 Congress Rolls Back Loan Safeguards
Following the Senate’s lead, the U.S. House of Representatives voted Tuesday to rescind safeguards that prevent auto lenders from discriminating against minorities and others by unfairly marking up car loans. President Donald Trump is expected to sign the legislation.
Although it’s difficult to say how or whether dealers would change their practices if this becomes law, consumer advocates have said they are vigorously opposed to the move by Congress to roll back the Consumer Financial Protection Bureau’s 2013 auto-lending guidance.
Regardless, car buyers would be smart to do their research and come prepared to the dealership to get their best rate.
“Everyone needs protection, not just minorities. If you’re not an astute shopper, you can easily wind up paying more in interest for your loan.”
That’s the warning from Oren Weintraub, president of Authority Auto, a car-buying concierge service in Tarzana, California.
2 Why the Guidance Matters
It’s common for dealers to arrange loans on behalf of car buyers and to mark up the interest rate by several points as compensation for this service, which provides additional profit for the dealership. However, loans for minority borrowers were historically marked up higher — in some cases by as much as six times the rates for white borrowers, according to the National Consumer Law Center.
To combat this, the CFPB in 2013 warned auto lenders that they could be held accountable for discriminatory pricing. It also urged lenders to cap how much dealers can increase rates, or switch to a flat-fee model to limit the potential for basing markup decisions on factors other than creditworthiness.
Since issuing the guidance, the CFPB has taken action against four auto lenders, ordering millions of dollars repaid to affected customers.
3 What This Means for Car Buyers
It’s not yet clear how much this change would affect interest rates or dealer practices. But regardless, coming to the car lot with a preapproval can put you in a much stronger negotiating position.
“I don’t think you’ll see dealers taking advantage of people because of this,” says David Bennett, manager of AAA’s automotive programs. “It really just highlights the need for people to get preapproval [on a car loan] before going to buy a car. Then, if the dealer can beat that rate, you can save more money.”
Consumer advocates, though, are alarmed. Weintraub, a former car dealer himself, says, “They are dancing at the dealerships” because of this ruling. He predicts that some markups could be doubled or even quadrupled.
4 Get the Lowest Rate on Your Auto Loan
Getting a dealer to try to beat the rate you know you qualify for is one of the smartest moves car shoppers can make. While banks, credit unions and online lenders have competitive rates, car dealers have access to some of the lowest rates, sometimes as low as zero percent interest.
However, to get the best rates, car shoppers need to take steps to protect themselves at the dealership. Weintraub recommends getting preapproved for a car loan from an independent lender because:
You can negotiate more effectively. With preapproved financing in place, you can easily avoid a common negotiating tactic by dealers: focusing only on the monthly payment, which makes it easy to lose track of the cost of the car and the terms of the loan.
It sets a baseline for your interest rate. Once the price of the car is agreed on, you can tell the finance manager you’re paying with a preapproved loan. Then, to get your business, the finance manager will often ask you what interest rate you have and try to meet or beat it.
5 More Car Financing Tips
Car buyers with lower credit scores, who may be uninformed about their credit or worried they’ll have limited financing options, are especially vulnerable to interest rate markups at the dealership. However, it’s important for all car shoppers to do the following:
Apply to several competing lenders to find the lowest rate.
Avoid loan terms of over 60 months for a new car and 36 months for a used car. (You can use an auto loan calculator to see how loan terms change the monthly payment and total interest paid.)
Search automakers’ websites for special loan deals.
Philip Reed is a writer at NerdWallet. Email: preed@nerdwallet.com. Twitter: @AutoReed.
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Frequently Asked Questions
What did Congress vote to change about auto loans?
Following the Senate, the U.S. House of Representatives voted to rescind safeguards that prevent auto lenders from discriminating against minorities and others by unfairly marking up car loans. The measure rolls back the Consumer Financial Protection Bureau's 2013 auto-lending guidance, and President Donald Trump is expected to sign the legislation into law.
Why does the CFPB's 2013 auto-lending guidance matter?
Dealers commonly mark up loan interest rates by several points as compensation, but loans for minority borrowers were historically marked up higher, in some cases by as much as six times the rates for white borrowers. The 2013 guidance warned lenders they could be held accountable for discriminatory pricing and urged them to cap markups or use a flat-fee model.
How does getting preapproved help me at the dealership?
A preapproval puts you in a stronger negotiating position. It lets you avoid the dealer tactic of focusing only on the monthly payment, and it sets a baseline interest rate. Once the price is agreed, you can tell the finance manager you have a preapproved loan, and they will often try to meet or beat your rate to win your business.
How can I protect my credit score while rate shopping?
Apply to several competing lenders to find the lowest rate, but make all of your loan applications within a 14-day period. Doing so avoids the impact of multiple hard credit inquiries, which can otherwise lower your score when treated as separate events rather than a single shopping window.
What loan terms should car buyers avoid?
Avoid loan terms of over 60 months for a new car and 36 months for a used car. You can use an auto loan calculator to see how different loan terms change the monthly payment and the total interest paid. It also helps to search automakers' websites for special loan deals before you buy.
