It’s a fairly common way to pay for a used car, and has been for a while: You go to the dealership, find the car you want, and then arrange for financing with the dealership. It’s so common, in fact, that many people don’t even realize that there are other ways to pay for their used car. And now the city of New York is looking to ensure not only that consumers know about different financing methods … they want to do away with some of the less ethical practices that surround the dealer financing process altogether.
Direct And Indirect
To explain why New York City is so concerned about used cars and consumer issues, we first need to look at how dealer financing works. It’s very rare for a dealer to actually be lending you the money; more often than not, dealer financing is “indirect,” where the dealer serves as a middleman between you and the bank.
This can open up some issues that can cost you a surprising amount of money. For example, with an indirect loan, the middleman can add a point or two of interest to your loan, called “dealer reserve.” Technically, you’re paying the dealer for arranging the loan and you give them the money in the form of a lump sum.
And it’s not only perfectly legal for them to drive up the cost of your used car … they’re not even required to tell you about it. Similarly, there’s absolutely no reason the lender can’t offer the dealer incentives to bring them customers, and once money is in the mix, well, we all know the stereotype of the shady used car salesman and what he’s willing to do for a buck. Reports of sales personnel pushing car loans on people who can’t afford them is really just the start of the issues.
Direct financing, on the other hand, is much more regulated and much more transparent. And there’s no reason you can’t secure your auto financing before you ever set foot on a dealership’s lot, which is why New York City is launching a program to encourage direct financing.
New York’s program is voluntary, but they’re calling on lenders to remove any sort of incentive on indirect financing. For example, lenders participating in the program wouldn’t offer any sort of compensation for referring customers, and would also agree to certain “affordability features,” such as limits on debt-to-income and payment-to-income ratios.
Needless to say, the city’s auto dealers are less than enthused about the idea, seeing that they’d be the ones getting their wallets dinged. They insist that they can secure their customers the best rates and that city intervention is unnecessary.
And, for now, the program is voluntary; New York is asking lenders to participate, but not yet requiring them to do so. Still, it demonstrates that concern over dealer behavior is increasing, and even if it’s voluntary, finding your financing before you go to the dealer is just financially savvy. After all, it’s one thing if the sales team controls how you pay for your car … and quite another if all they have to do is give you what you’re looking for to get your business.