Basics of Predatory Auto Financing

Borrowers who finance their auto loan through a dealer are vulnerable to a litany of predatory practices. When a dealer arranges financing for a loan, they then assume a dual role: seller of the vehicle and broker of the vehicle financing. Without fairness and transparency about the process of buying and financing a vehicle, consumers are subject to manipulation that can add thousands to the cost of their car and even strip them of their basic rights.  

Some common abuses include:

  • Dealer reserve kickbacks: Similar to mortgage yield-spread premiums, the consumer qualifies for a buy rate APR from the lender, while the dealer brokering the loan arbitrarily adds points to the APR for additional profit.
  • Loan packing: Overpriced and underused add-on products including GAP insurance, vehicle service contracts, credit life and disability insurance, and theft deterrent packages.
  • Spot delivery “yo-yo” scams:  After the consumer drives the vehicle home, the dealer claims to be unable find a lender to fund the loan, the consumer is required to return the car and renegotiate—often without the option of getting all of their downpayment and their trade-in back.
  • Binding mandatory arbitration clauses: Arbitration clauses essentially waive the consumer’s right to sue and appeal in court, leaving them with an arbitration system that is potentially more expensive and biased toward the dealer.

Want to learn more?

Use this tool: Auto Dealer Markup Calculator

Read our research: Car Trouble: Predatory Auto Loans Burden North Carolina Consumers