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It could be her financial history, or it could be that the salesman sold her on the amount of payment she could afford and then found her a loan that would make the payment that high. Banks generally pay dealerships a commission when they sell a customer financing, and I'm betting the commission on a 23% loan is a lot higher than the commission on a 2.3% loan.
It could be her financial history, or it could be that the salesman sold her on the amount of payment she could afford and then found her a loan that would make the payment that high. Banks generally pay dealerships a commission when they sell a customer financing, and I'm betting the commission on a 23% loan is a lot higher than the commission on a 2.3% loan.
It's actually not. The commission or "dealer reserve" is generally a flat amount regardless of the rate of the loan. The dealer ends up with the same cut (can be anywhere from 1%-4%, with some states capping it at 2.5%) regardless of the total rate of the loan. So, a 6% loan could actually be a 3.5% loan with a dealer reserve of 2.5% which is the exact same thing to the dealer as a 23% loan that is actually a 20.5% loan with a dealer reserve of 2.5%.
I am betting on it being a financial history issue. A 23% loan is pretty common in the high risk loan fields. In Texas, 27% is the cap. There are numerous financial companies to which these sort of loans are their bread and butter.
That's actually not quite right, the legal limit the finance company can charge is 24.99%, 27% must be if you include what a dealer might add on (they can legally add up to 3%)
And yes, we see people finance at that rate every single day, some people simply do not have any other choice.
Personally I think it should be illegal to charge anything over 10%, but that's just my opinion.
It's actually not. The commission or "dealer reserve" is generally a flat amount regardless of the rate of the loan. The dealer ends up with the same cut (can be anywhere from 1%-4%, with some states capping it at 2.5%) regardless of the total rate of the loan. So, a 6% loan could actually be a 3.5% loan with a dealer reserve of 2.5% which is the exact same thing to the dealer as a 23% loan that is actually a 20.5% loan with a dealer reserve of 2.5%.
Yes, but at many traditional dealerships, the sales person is paid a commission based off the sale of a finance solution, not all financing companies yield the same commission, most sales people, when faced with uninformed customers will therefor select the finance approval where they get the best commission, not the one that necessarily best suits the customer.
It's actually not. The commission or "dealer reserve" is generally a flat amount regardless of the rate of the loan. The dealer ends up with the same cut (can be anywhere from 1%-4%, with some states capping it at 2.5%) regardless of the total rate of the loan.
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Originally Posted by TheViking85
Yes, but at many traditional dealerships, the sales person is paid a commission based off the sale of a finance solution, not all financing companies yield the same commission, most sales people, when faced with uninformed customers will therefor select the finance approval where they get the best commission, not the one that necessarily best suits the customer.
Precisely. When I sold cars we got virtually nothing for financing a customer through Chrysler Financial, 1% through the local banks, and something over 2% when we dealt with lenders who specialize in high-interest loans for people with poor credit such as Household Bank.
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So, a 6% loan could actually be a 3.5% loan with a dealer reserve of 2.5% which is the exact same thing to the dealer as a 23% loan that is actually a 20.5% loan with a dealer reserve of 2.5%.
Not really. The dealership is paid a one-time lump-sum commission where the lender collects interest based on the daily (or weekly or monthly, depending how it's calculated) loan balance. So while subtracting the dealer's commission and considering it separately would lower the effective rate of the loan, the calculation isn't nearly as simple as subtracting the dealer's cut from the bank's interest rate.
This is exactly why the rich get richer and the poor get poorer.
To the OP... I don't know how old your mother is, but you need to help her. She obviously doesn't understand the financial impact of a 23% interest rate. If anything, you should apply for a personal loan and use the money to pay her car off, then have her make payments to you. It sounds like she probably wouldn't qualify on her own with a good interest rate. She'll pay off the car much quicker this way.
I'd suggest taking a look at all her accounts. I used to be in finance, I can't tell you how many times I've seen investment accounts, bank accounts, where people just have no clue what they are doing with their money. My own parents are about 70 yrs old now, I've had to start managing their money for them, because they are starting to get conned easier and easier with bad investment advice. Sounds like your mom needs someone to prevent her from getting into something that isn't in her best interest.
Not necessarily. My car payment on a 2012 Grand Cherokee is about $490/mo at 2.4%. It's a $35K car, which is why I have a high-ish payment. At that low of a rate, there's no way I would pay out 35K in cash at once, I can find other things to do with the money that'll make more, my 401 or an IRA for one.
And for the record, not everyone drives a new car to make their neighbors jealous. I drive a new car because I wanted the new generation GC and not a 2005-2010, be da*ned what anyone else thinks!
This was for someone who is paying $48K for an $18K car.
My guess would be that she has either no credit or a very low credit score. She is an adult, she signed the loan, it is not the lenders problem, no one forced her to sign the agreement.
If she had a doubt, she should have talked to someone who has more financial sense than she does.
I want to help my mother payoff her car note, but her story sounds a bit fishy to me.
Could someone with lots of car experience let me know if the following is possible… could someone REALLY get ripped off this badly or does it sound like my mother isn't being honest with me. I've always paid cash for older cars, so I don’t know the ropes when it comes to making monthly car notes.
Here it goes…
* In 2006, when she bought the car, the price tag price was $18,000.
* I think she said her interest rate was 23%.
* She paid a $1,000 down.
* Monthly payments were $490 for 6 years. $35,280 for 6 yrs + $1000 = $36,280 total.
* She’s paid a bit more than that on the car however. Maybe about $38,000 to $40,000.
And she said she still owes close to $7,000 on the car. Overall, she’s telling me that she’ll have to pay about $48,000 for a $18,000 car. $30,000 more than it is worth. Is this possible?
23% interest? Holy moly someone took her to the cleaners. "Brief History of Auto Finance
Rates at the auto finance companies fell considerably during the U.S. financial crisis in 2008 and 2009. In the fourth quarter of 2009, rates stood at 3.47 percent. That was a pretty marked decline. In 2005, rates averaged about 6 percent. They fell fairly quickly to 4.99 percent in 2006"
My guess would be that she has either no credit or a very low credit score. She is an adult, she signed the loan, it is not the lenders problem, no one forced her to sign the agreement.
If she had a doubt, she should have talked to someone who has more financial sense than she does.
Buh-buh-butttttt....banks are EVIL. They take advantage of people who can't be expected to read the fine print. Personal responsibility is not required of someone to get a car loan. At least that's what Obama told me...
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