In many cases, dealers have some amount of leeway when it comes to what they can markup on a vehicle. This can sometimes include the interest rate you're given when shopping for an auto loan. Let's look at what dealers can do when it comes to your APR and interest rate markups.
When you're financing a vehicle through a dealership, it's possible to see a difference between the rate you're offered by a lender and the rate that a dealer shows you. This is often because dealers that set up financing are allowed a certain percentage that they're allowed to markup your interest rate. This is the difference between "buy rate" – the rate the lender offers – and "contract rate" – the rate you're presented with by the dealer.
Dealers get to do this in order to make a small profit for setting up financing through a lender they work with, like a captive lender. Since the rate you're offered by a dealer may not be the lowest rate authorized by a lender, it's a good practice to ask if you qualify for a lower rate. Interest rate is one of the many things you can typically negotiate on a car loan.
Interest rates that are marked up by a percentage point or more can be especially hard to deal with if you're a bad credit borrower. These borrowers typically qualify for higher interest rates to begin with, which makes the markup hard to swallow. In order to make sure you're getting the best rate for your situation it's very important to know where your credit stands, to know the average interest rate for someone in your credit score range, and to rate shop.
Rate shopping is the practice of looking for the best rate on your next loan by applying for multiple auto loans within a 14-day window. If you do this, only one hard inquiry should impact your credit score. This can be more difficult when you have bad credit since you may not qualify for any promotional incentives and may be left comparing standard rates, something that is climbing this year.
Even though some dealers can mark up your interest rate when they set up the financing for you, not all lenders do this. In fact, in light of the recent difficulties facing the auto industry, some manufacturers have been cracking down on how much of a markup their dealers are allowed. For example, Audi and its brands just dropped the markup cap from 3% to 1% to help retain customers.
If you're worried about a markup impacting you, you can always ask the dealer outright if they're charging you a markup. Knowing this allows you the room to know what you're working with, so you can know what's negotiable, but there's no guarantee you will get a rate as low as you'd like. APR is just one of the ways a dealer can markup your auto loan.
The best practice for combating today's high and rising auto loan prices is to do your homework, be prepared, and come ready with a down payment or deposit, because, despite dealer markups, vehicles are moving fast.