CBS 60 Minutes report
April 4, 2004

The Best Possible Deal?

Dealerships routinely mark up the cost of car loans without telling the customer.

"If...they're less affluent, they don't appear to be well-educated and they're a minority, [sales people] may very well try to overcharge them...charge what the traffic will bear."
Steve Brobeck

(CBS) American households have at least one car loan -- and more often than not, they've arranged that loan through a dealership after being promised "the best possible deal" on the interest.

But dealerships routinely mark up the cost of loans without telling the customer. It's a practice that would be illegal if you were financing a home, but not when you're financing a car. Its estimated that Americans are paying a billion dollars a year in undisclosed finance charges called dealer reserve.

If you don't know about it or ask about it, the salesmen and the finance managers certainly aren't going to tell you. Correspondent Steve Kroft reports.

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Most people who walk into an automobile showroom know they are expected to drive a hard bargain with the salesman until they can finally agree on the price of a new or used car. And once they do, it's off to the finance office to fill out all the paperwork and arrange for a car loan.

The typical consumer thinks that negotiations are over. You have left the frying pan and you are headed for the fire, says attorney Jim Andrews, who has been after car dealers for years.

He says the finance office is where most customers get burned: You think they're just helping a guy out in the showroom sell the car. You don't expect them to lie to you, and its deceptive.

Dealerships don't actually make auto loans. They don't put up any money, and they don't have any risk. They simply arrange the loans through a finance company and promise the customers the best possible terms.

What they tell consumers is that they're gonna give 'em the best interest rate they can get them, says Andrews. And they find out what that rate is from the finance company, and then they throw in a few points for themselves.

Those few percentage points of interest that dealers add on for themselves - without telling the customer - is called "dealer reserve," and it can add thousands of dollars to the cost of buying a car.

The practice, which was an industry secret until a few years ago, has since produced a wave of litigation against some of the biggest names in the business such as GMAC, Ford Motor Credit, and Nissan Motors Acceptance.

Andrews brought suit against Covington Pike Toyota in Memphis, Tenn., and its corporate parent, the United Auto Group, a Fortune 500 company with annual sales of more than $8 billion. The class action accuses them of using deceptive sales practices on more than 12,000 Covington Pike Toyota customers, like Terry and Cheryl Traylor.