Although US interest rates are heading down, US consumers' auto loans are not expected to reap the full benefits, a report says.
Interest rates are down by 1% or more on benchmark 10-year US Treasury securities over the past year, with interest rates declining on all types of loans. Because of weakening economic data, trade disputes, and global uncertainties, the Fed is expected to lower rates further this week.
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Consumers, however, won't reap the full benefit of the decrease on their auto loans as car dealers will still mark up borrowers' rates on loans financed through the dealership.
According to Outside Financial Chairman Jon Friedland, "Because the average car dealership in the United States is selling fewer new cars this year than last, and selling them at lower margins, car dealers increasingly rely on the financing office to compensate. In fact, car dealers now earn more profit from financing cars than from selling cars."
The Outside Financial Markup Index has tracked the markups embedded in auto loans arranged by car dealers since 2010. Sonia Steinway, Outside Financial's CEO, said: "The year 2010 is significant because that's when the Dodd-Frank Wall Street Reform and Consumer Protection Act established safeguards against predatory lending and increased loan disclosure requirements. Unfortunately for car buyers, auto dealers were specifically excluded from these regulations, even though 80% of new car financing is originated by dealers."
Outside Financial data released for the year-to-date through July reveal that consumers paid an average of USD1,904 in undisclosed fees and markups, a 6% increase from 2018 and an 82% increase since 2010, marking a record high.
"Consumers deserve the same transparency and choice in the financing transaction as they have when price shopping for a car," Friedland said.
