Specific Auto Debts May Add Expensive Skin Tax
There are a few specific auto loans that will add ‘skin tax’ making it costlier for you. This type of specific tax is applicable irrespective of the fact whether you are looking for a new or used car loan and even if you are going to use financing that is arranged by your car dealer.
That is why, experts and consumer groups warn about auto loans and ask you to watch out as you may be paying more for the particular loan, especially if you are a Hispanic or black.
The Consumer Federation of America, CFA has released a recent report titled, “The Hidden Markup of Auto Loans” in which it reveals the common practice by the auto finance companies especially those that are provided by the dealers. The dealers in these types of loan typically mark up the rate of interest on car loans.
According to the report, these finance charges can typically add up to your cost of the loan by $1,000 at least thereby increasing your cost of borrowing.
The report also says that this additional cost on an auto loan is typically costing the consumers as high as $1 billion in a year!
Typically, one in every four auto loan consumers is affected by the higher-priced loans. This is especially seen for those specific loans where the consumers take it through dealers.
In addition to that, the report also says that the subjective nature of such dealer markups has resulted in significant discrimination against the Hispanics as well as the African-Americans.
In Comes The Loan Markup
The skin tax concept comes into play when the finance markup charges are added to a loan. This typically burdens the African-Americans as they have to take out these loans at much higher costs. These result in this type of specific borrowers to find organizations and resources such as NationaldebtRelief.com and others to reduce their debts burdens.
The variance of debt burdens for people of colour is not only the result of the different policies followed by the auto lending companies but also has several other reasons.
The most significant factor that is aggravating about this practice is the fact that the Latinos and blacks usually have a good credit record and are willing to pay more for these loans arranged by the car dealers.
Another significant reason is that most of the people are unaware of such a fact that exists in practice. On the other hand, those who know that such practice exists such as the regulators and the legislators are found doing nothing to curb this practice.
Auto dealer loan markups are perhaps the most devious and dubious way to make money by the car dealers. This is the practice of making additional profit wherein most of the times and cases these markups are kept secret by the dealers to the consumers.
The Way It Works
The loan markups by the dealers work in a specific way. This is how:
The consumer decides whether or not to let the car dealership handle the financing on their purchase.
The dealer then contacts a lender.
The lender then considers the credit history of the potential buyer.
All other relevant info such as the type of vehicle being purchased, amount of loan, the length of the loan is taken into consideration by the lender.
Finally, the loan application is approved for a specific annual percentage rate known as the APR or as the ‘buy rate.’
It sounds and seems to be pretty simple and fair but it is not actually. This is where the game of the car dealer sets in unbeknownst to the consumers. The dealership here may typically decide to increase the buy rate with no particular rhyme or reason cited for it. This, strangely, is the legal way to pick the pockets of people.
The Actual Scenario
Therefore, for example, if the buy rate of a specific customer is found to be 5%, the car dealer may say that the particular loan is approved at 10%! Breaking it down further it can be said that:
Assume that you want to buy a car that costs $20,000
The interest charges on a loan for 48months is at 5% which will come up to $2,100
However, if the rate is increased to 10% the interest charges will jump to as high as $4,300!
This means you pay another $2,200 for the loan, which is downright unfair.
Recently, a few auto lenders have been good enough, such as Ford Motor Credit Company and General Motors Acceptance Corporation, to cap such markups of the dealers up to 3%, which is ideally a welcome and reasonable move.
Few people, and reasonably so, believe that even such capping by the auto lending companies is not reasonable enough. They argue, and rightfully so, that the auto loans as such are already priced high to include the profit for the lender in it. Therefore, it is unreasonable and downright unfair to charge the car purchasers even a single penny more.
On the other hand, the auto lending industry argues that auto dealers should be paid this amount as they are helping the consumers by arranging finance for them as well as the auto lending industry by providing more businesses indirectly. It is their right to claim such a ‘service charge!’
This rate provided to the dealers by finance companies is a wholesale rate and National Automobile Dealers Association, NADA says in a statement that it is not accurate to say that the car dealers charge extra from the car buyers. They support their statement saying that since this dealer assisted financing is charged at a wholesale rate, it is not available to the public. However, in reality, such markup is undisclosed.
A Reasonable Conclusion
Therefore, you may at this point think, how much should the dealers get for their service? Well, experts say that a fee of $100 to $200 maximum is more than enough compensation for the dealers to arrange for such financing and that too it must be disclosed.