Hidden Profit

The Rate Markup

The bank approved you at 5%. The dealer tells you 7%. That 2% difference goes straight into their pocket.

How It Works

The Simple Version

When a dealer arranges your financing, they get a rate from the bank (the 'buy rate'). They are legally allowed to mark it up and keep the difference as profit. You never see the real rate you qualified for.

The Math That Hurts: On a $30,000 loan for 60 months:

At 5% APR: You pay $33,968 total ($3,968 in interest)
At 7% APR: You pay $35,642 total ($5,642 in interest)
Dealer's Hidden Profit: $1,674

How They Get Away With It: Dealers are not legally required to tell you what rate the bank actually approved. They frame the marked-up rate as "what you qualified for." Unless you have a competing offer, you have no way to know.

Who Gets Hit Hardest: People with credit scores in the 650-720 range. Good enough to qualify for decent rates, but not so good that they'd definitely shop around. Dealers know these buyers are relieved just to get approved.

Industry Term: This practice is called "dealer reserve" or "participation." It's legal in all 50 states, though some cap the maximum markup at 2-2.5%.

Quick Decision

Quick Math

Each 1% rate increase on a $30,000 / 60-month loan costs you:

~$800

Worth fighting for.

How to Protect Yourself

Get Pre-Approved First

Visit your bank or credit union before the dealership. A pre-approval letter is your proof of what rate you actually qualify for. Dealers can't lie about your creditworthiness when you have documentation.

Ask for the Buy Rate

You can directly ask: "What is the buy rate from the bank before any dealer participation?" They may not answer, but asking signals that you know how this works.

Credit Union Advantage

Credit unions are non-profit and typically offer rates 1-2% lower than dealer financing. Many offer auto loan pre-approvals online in minutes.

Popular options: Navy Federal, PenFed, DCU, Alliant, local credit unions. Most allow you to join with a small donation to a partner charity.

What's Next?

The Four-Square Trap

How they hide rate in payments

Battle Plans

Step-by-step buying guides

Negotiation Scripts

What to say about rates

Loan Calculators

See the real cost difference