April 9, 2014

A brief answer to the question is found on the Center for Responsible Lending website which reads:

The dealer reserve is a kickback auto dealers receive for selling customers loans with higher interest rates than that for which the customer qualifies. Dealers justify markups as compensation for time spent finding financing, despite the fact that the average car buyers spends about 30 minutes with the finance department, which stands to gain over $1,000 per hour for their service.

Dealers provide financing from lenders for the convenience of the customer. Or is it dealers provide financing for additional profit? It could be a combination of the two but the fact is clear; the profit generated in vehicle financing at the dealership is huge. This includes used vehicles, as well as, new.

Here’s why. There are many lenders providing financing at dealerships but most dealers will utilize the financing services provided from about an average of nine different lenders. Utilizing multiple lenders provides the dealer’s finance & insurance manager’s leeway to select a lender best-suited for their purpose.

A lender offers financing to the dealer at a “buy rate.” For instance, a lender provides the dealer a rate of 3.5% on a 60 month loan. The 3.5% is an established “buy rate” which means the dealer can offer to the customer at 3.5% or markup the rate to a maximum set by the lender. The markup is paid to the dealer (from the lender) and this is called “reserve.” If the dealer quotes the lender buy rate, a “flat fee” is paid to the dealer. The flat fee is set by the lender and is not negotiable.

A wise decision by the consumer (you & me) is to visit our credit union prior to visiting the dealer. Not only can you have your loan pre-approved, you will receive the same rate as all other members in your credit category.