Recently, Honda settled a lawsuit with the Justice Department over discriminatory lending practices. On paper, this doesn’t sound like a net win for anyone, but it may, in the long run, be good news for those both buying cars and selling them.
At issue was Honda’s “dealer reserve” practices. Generally, when you secure a loan from a car dealership, the dealership is given a percentage point of the interest, either as profit from the loan, or added onto the interest. This is a common practice and entirely legal.
What wasn’t, however, was that Honda charged more interest to non-white consumers. The Justice Department demonstrated a clear pattern of discrimination, and rather than being dragged to court, Honda simply agreed to settle the suit and adopt new practices with dealer reserve. And this is where it may be a net benefit for everyone.
To this point, the only thing consistent about dealer reserve has been that it exists. It can vary wildly from person to person and from dealership to dealership. The terms of Honda’s settlement mark the first time that dealer reserve policy has been codified and, more importantly, cleared by the federal government. Instead of just charging customers whatever they feel like, Honda has to abide by a strict standard that everyone, regardless of their situation, is charged only a set amount of dealer reserve, namely 1.25% for loans lasting less than 60 months and 1% for loan terms longer than 60 months.
So why is that good news? It may force a level of price standardization in an industry notorious for a lack of it.
The issue, as we noted, is that interest can vary to a surprising degree from person to person; two people with the same credit report can walk into a dealership, buy the same car with the same trade-in and down payment, and walk away with completely different interest rates. Practices like this are how car dealerships got their reputation for being dishonest.
If, however, the deals are standardized at Honda, that puts downward price pressure on dealerships. After all, Honda might look bad in the short term, but in the long term, if you walk into a Honda dealership, the government is guaranteeing that your interest rate isn’t going to be driven up. That will force other dealerships to get in line, or worry about being left behind. It might even make lending more profitable for some dealerships, creating an incentive to offer better financing terms.
That said, though, it does also illustrate the importance of securing your financing before you ever set foot on a dealership lot. Even if you just gather quotes before speaking to a salesperson, it shows you what you can afford and gives you a sense of where your interest rates should be. After all, there’s no reason to charge you dealer reserve, and if you can prove to a salesperson that you can get a better deal … that gives them a powerful incentive to offer you one.