2.4 Finance Charge Limits between 2% and 2.5%

One of the provisions of the Car Buyer’s Bill of Rights that directly affects your profitability is the finance charge markup limit. When you arrange financing for a buyer — when you submit the buyer’s credit application to lenders and get an approved rate — the lender gives you a “buy rate.” That’s the interest rate the lender is willing to offer for that particular buyer’s credit profile. Historically, dealers have been able to mark up that rate — adding percentage points on top of the buy rate and keeping the difference as dealer reserve income.

The Car Buyer’s Bill of Rights limits how much you can mark up the finance charge on qualifying used vehicle transactions. The limits are as follows, and pay close attention because they depend on the contract term. For contracts with a term of 60 months or fewer — that’s five years or less — the maximum markup is 2.5 percentage points above the buy rate. For contracts with a term of more than 60 months — longer than five years — the maximum markup is 2 percentage points above the buy rate.

Let’s walk through an example. A buyer applies for financing on a used vehicle that qualifies under the Bill of Rights. The lender approves the buyer at a buy rate of 5.0 percent. If the contract term is 48 months, you can mark up the rate by no more than 2.5 percentage points, so the maximum rate you can charge the buyer is 7.5 percent. If the same buyer wants a 72-month term instead, your maximum markup is 2.0 percentage points, so the maximum rate is 7.0 percent.

Think about this from a business perspective. The longer the contract term, the lower your allowable markup — which makes sense from a consumer protection standpoint, because on a longer-term loan, even a small rate increase results in substantially more interest paid over the life of the contract. A 2-point markup on a 72-month loan costs the buyer considerably more in total dollars than a 2.5-point markup on a 48-month loan.

Here’s where dealers run into compliance issues: some dealers don’t track their markups carefully, especially when they’re presenting multiple financing options to the buyer. If you show the buyer three different term lengths at three different rates, you need to make sure each option independently complies with the markup limit for that term. You can’t average the markups or shift excess markup from a longer term to a shorter term.