What is the auto loan scam called dealer reserves?

Dealer reserves are the kickbacks that auto dealerships receive from banks for originating auto loans. When auto dealers get a buyer to finance a vehicle in the dealership, they mark up the interest rates to higher levels than a direct lender would. That way, the dealer ensures a kickback from the dealer for the extra money made on the auto loan.

In fact, dealer reserves are the main source of revenue for car dealerships. New vehicle sales amount for mere dollars for the dealership. In 2011, for instance, car dealers made an average of just $23 dollars per new vehicle sold. In the recent past, they actually lost money on every new vehicle sold.  

As a result, they rely on originating auto loans in order to stay in business. When they do get a buyer to agree to dealership financing, the dealership marks the interest rates up, which the banks then pay the dealership with as compensation for the lead.

Those markups, along with other services, amounted to an average $786,000 per dealership in 2011. That’s hundreds of thousands of dollars in dealer reserves that buyers could potentially still have if they got their auto loan from a different source.

Because of this practice, most prospective vehicle buyers are advised to obtain financing from a traditional lending source as opposed to borrowing directly from the dealership. The best way to do this is through pre-approval and prior discussions with a lender before ever walking onto a car lot.

Even when dealerships try to lure buyers into on-site financing with zero-percent interest rates, the buyer will likely shell out more money than they otherwise would have with a direct lender. Using forms like the ones found on this site allow potential buyers to compare auto loan interest rates from multiple lenders at once, ensuring themselves the lowest price possible. If nothing else, buyers can use the interest rates offered as a guide when hearing out the offers from a dealership.