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Should Car Dealers Receive Kickbacks from Setting up Car Loans?

last updated December 3, 2013 by

Here at Complete Auto Loans, we have always been wary of car dealerships that offer loan packages with in-house financing agencies.  We strongly believe that combining car dealerships with financing companies creates too much confusion for consumers as to the price that they are paying for a car, and it gives the dealership an incentive to put drivers into cars that they can’t afford.  Several rulings in December of 2013 reinforce this belief, as the United States court system is looking into kickbacks from dealers to lenders, and how this might have encouraged illegal lending programs across the country.

Why do Dealers Receive Kickbacks

Margins are down across the automotive industry, as a result both of increased competition and increased cost of the technology and electronics that goes into cars.  Dealers are increasingly hard pressed to make a profit, and some even sell cars at a loss in order to upsell their patrons on packages like “clear coating” and other useless add-ons.  One gold mine for dealers that they are beginning to use more and more is auto lending.  Dealers can refer their customers to lending agencies in exchange for kickbacks, taking money throughout the life of the car loan and making a huge profit on each customer.

Why are Kickbacks Bad?

One of the problems with kickbacks is that they create an incentive for dealers to trap people into loans that are less-than-prime.  For example, the New York Times found that the average dealers arranged loan had an interest rate of more than 2 percent higher than the loans from other agencies.  Over the life of a typical auto loan, dealers receive as much as $1,000 from kickbacks.  Instead of looking for loans that might suit each individual customer, dealers have a direct financial incentive to find a loan with a high interest rate that delivers the maximum of kickbacks to the dealership.

Avoiding Dealer Kickbacks

You are already paying your dealer for a car, you should never pay them for the loan as well.  While the United States congress is moving towards more regulation for the auto loan industry, and auto dealers might be required to disclose their loans in the future, the only surefire way to make sure you aren’t getting a terrible deal is to separate your loan origination and car buying completely.

Not only can you find a better interest rate by shopping around for loans from a variety of sources, but you can avoid the type of games that are played by money-hungry dealers.  Online lender like Complete Auto Loans can provide you with an instant quote that will tell you exactly how much you will pay over the life of a loan, no strings attached.