How a car loan rate gets marked up

In dealer-arranged auto financing, the lender tells the dealer a buy rate: the APR at which the lender will buy the retail installment contract for a given applicant. The dealer may offer the buyer a higher contract rate. The difference is dealer reserve, or markup. The buyer pays the contract APR. The reserve is compensation between the dealer and the lender. It is not a separate line you can always see, which is why the contract APR and the buy rate are different numbers even when only one of them is on the paper you sign.

The APR on the contract is the Truth in Lending disclosure of the cost of that credit. It is the rate that amortizes the amount financed, including any financed add-ons the contract rolled in. Add-ons — service contracts, gap products, aftermarket items — increase the amount financed and the finance charge. A low advertised payment can hide both a longer term and a larger amount financed.

The buy rate itself depends on the lender’s reading of credit, the term, the vehicle, and the down payment. A rate from a bank or credit union, obtained before you sign, is the comparison point. If the dealer’s APR is higher, ask whether the gap is reserve, a different lender, or a different term. This overview does not claim every dealer marks up every contract. It claims the two rates are not synonyms. Read the APR on the contract you sign.