Markup

Markup in auto financing refers to the practice of dealers increasing the interest rate offered by the lender (the buy rate) to create the higher sell rate presented to the customer. This markup, usually expressed as a percentage, becomes a source of profit for the dealership, as the additional interest paid by the consumer is shared between the lender and the dealer.

For example, if the lender’s buy rate is 3.5% and the dealer adds a 2% markup, the consumer pays 5.5% APR. While this is legal, it is often criticized for lacking transparency and potentially exploiting uninformed consumers.

Markup can add hundreds or even thousands of dollars in interest costs over the life of a loan, making it one of the most significant hidden costs in auto financing. From the dealer’s perspective, markup incentivizes financing through the dealership instead of external lenders, enhancing profitability.

For lenders, it ensures widespread distribution of their loan products through dealer networks. For consumers, markup is a risk that underscores the importance of shopping around, securing pre-approvals, and negotiating financing terms just as aggressively as vehicle prices.

Regulatory agencies have scrutinized markup practices, and some lenders have introduced flat-fee structures to reduce potential discrimination or unfair pricing. Still, markups remain a common practice in the industry.

Understanding markup allows consumers to identify potential savings and advocate for fairer loan terms, ensuring they do not overpay simply due to lack of awareness.