Skip navigation
Shocking News: Dealers Don’t Give It Away

Shocking News: Dealers Don’t Give It Away

Car dealer loan “markups” do not cost U.S. consumers $26 billion a year, but that’s what Sen. Elizabeth Warren keeps saying.

Here’s something astonishing.

Supermarkets – those food emporiums where staffers keep a smile while asking “paper or plastic?” 3,000 times a day – deviously mark up their merchandise.

Yes, they buy T-bones for one price and sell them for more. It should make us sizzling mad.

That’s not all. Service stations buy fuel at wholesale prices, then post higher pump prices. It’s unfair, especially at self-service spots where we do all the work and the staff seldom smiles.

The list of business rip offs goes on. The auto industry? Wow. It’s a cabal of about 40 different brands in the U.S. Every one of them builds vehicles for X dollar amount and charges people Y, with Y being greater than X. That’s X-rated.

And then there are auto dealers who sell those cars. You guessed it. They, too, charge more than they paid the factories for what’s on their lots.

It doesn’t stop there. Buckle up for this. Dealers get compensated for arranging and facilitating consumer car loans. About 80% of the time, dealers act as middlemen between vehicle buyers and lenders that finance a purchase averaging about $32,000 these days.

Dealers can help find the best consumer-loan rates, work through credit issues so a customer doesn’t become a loan reject and perform an array of front-end work for the lenders. The latter includes collecting credit-bureau histories, verifying financial information and finally submitting applications to the dealership’s portfolio of lenders to see who offers a loan with the best APR.

Dealers not only expect to get paid for doing all that, they do get paid. But they don’t annually make $26 billion a year from it. Yet, that is what Sen. Elizabeth Warren (D-MA) keeps saying as part of a whatever-it-takes campaign to end a long-standing part of dealer-assisted financing.

Consumer advocacy is cool. Not so hot is invoking untruths in the pursuit of truth, justice and the American way.

Sen. Warren in speeches and public appearances decries dealers and campaigns to “keep that $26 billion a year in the pockets of consumers where it belongs.”

She’s wrong in two ways. First, that $26 billion figure is bogus. The Washington Post, a newspaper that’s hardly the mouthpiece of auto dealers, did a step-by-step truth-test analysis telling how that oft-quoted amount came about and how erroneous it is.

The headline: “Warren’s false claim that ‘auto dealer markups cost consumers $26 billion.’”

The figure comes from an extrapolation based on an earlier extrapolation drawn from a narrow and small sample group of subprime borrowers. I took one statistical analysis class in college. Just about the first thing we learned was not to misuse data like that, lest sampling flaws telescope into kooky conclusions.

Yet that’s precisely what was done to get to $26 billion. Now, the bad data is cited during public-policy discussions. And Sen. Warren arguably is the worst offender.

It amazes me that smart people such as Warren, who taught law at Harvard, could say such dumb things, even after Washington’s hometown newspaper and others have set the record straight.

I mentioned my bafflement to an executive of the American Financial Services Assn. “She knows exactly what she is doing,” he said of Sen. Warren. “She’s smart enough to know that what she says resonates with a political base. So she keeps saying it. This is politics, after all.”

Thanks for the reminder.

It’s not just the $26 billion amount that’s way off. So is the base claim that dealers unfairly jack up the cost of a car loan.

Here’s what apparently confuses some people, or else they’re feigning fogginess:

The so-called buy rate is the wholesale financing rate lenders offer to dealers for doing the work tied to processing a consumer loan.

The lender is not offering the buy rate to the consumer, any more than wholesale rates are on price tags at retail establishments. It’s false to say the buy rate is what borrowers would get for car loans had not dealers elbowed their way in.

Dealers typically add a percentage point or two to the buy rate. The average add-on is 0.9%, according to the National Automobile Dealers Assn.

The trade group is quick to add that consumers are free to A) negotiate the rate or B) find a better one on their own. Most people don’t exercise option B because dealers typically offer lower competitive rates, NADA says.

Sen. Warren was the first person to head the Consumer Financial Protection Bureau, a creation of the Dodd-Frank Reform Act. The bureau has tried to muscle lenders into abandoning dealer reserve and replacing it with the likes of a flat fee. That effort has fallen flat.

I could argue either side of flat fee vs. dealer reserve. If put to it, presumably so could a trained attorney such as Sen. Warren. But let’s agree on this: Be honest about it.

[email protected]

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.