20/20: Beware the Car Dealer's Secret

ByABC News
December 13, 2000, 12:46 AM

Oct. 27 -- On todays 20/20, Arnold Diaz warns car buyers about the hidden charges car dealers may tack on during the purchase of a car.

According to consumer attorney Gary Klein, Its a dirty little secret that the auto lending industry has not owned up to.

It works like this. Car dealers do not do the actual money lending, but send your application to a number of lenders, who then tell them what interest rate you qualify for. They call that number the buy rate. But legally, car dealers are not required to tell you that rate or how much they are marking up the loan. Dealers get a small fee for arranging loans at the buy rate, but can make a lot more money if they can get you to pay a higher rate. And lenders encourage that because they usually split the extra income.

David Robertson, head of the Association of Finance and Insurance Professionals a trade group representing finance managers defends the practice, saying its akin to a retail markup on loans. The dealership provides a valuable service on behalf of the customer in negotiating these loans, he says. Because of that, the dealership should be compensated for that work.

And theres troubling evidence that black customers may be twice as likely as whites to have their rate marked up and by more. That evidence included in thousands of pages of confidential documents that 20/20 and The New York Times went into a Tennessee court to obtain shows that Nissan and GM dealers in that state routinely marked up rates for blacks, forcing them to pay between $300 and $400 more than whites.