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Man Warns That Dealerships 'Hide $4,000 In Your Loan.' Then He Reveals How

"It's legal, but..."

Man Warns That Dealerships ‘Hide $4,000 In Your Loan.’ Then He Reveals How

Photo by: Zac Smith & Kazuo ota

Ljeonida Mulabazi

By: Ljeonida Mulabazi

Mar 15, at 4:00pm ET

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Dealerships have long faced criticism for aggressive sales tactics and predatory fees, especially when it comes to financing. It’s the price negotiation that most buyers focus on, but the dealership's real profit may be buried in the loan paperwork.

According to a man who says he spent nearly three decades in the car business, dealerships can make large profits by manipulating interest rates.

Zac Smith, who runs the YouTube channel The Car Guy Chronicles With Zac, recently posted a video explaining how the tactic works. The clip was later reposted by TikTok account @grantchatter, where it has attracted more than 282,000 views.

In the clip, Smith holds up two documents. "This piece of paper says the bank approved my loan at 8.87%," Smith says, "And this is the contract the dealership had me sign at 11.37%. Same day, same bank, same loan."

The difference in interest rate, according to Smith, means serious profit for dealerships. "The difference between these two numbers," he says, "is that the dealership made almost $5,500 in additional profit."

Smith says he knows how the system works because he used to be part of it. "I worked in the car business for almost 30 years," he says. "And I’ve sat in that finance office manager’s chair and marked up the interest rates."

The Difference Between A ‘Buy-Rate’ And The Rate Customers See

According to Smith, when a customer applies for financing at a dealership, the dealership doesn’t send the application to just one lender. "They send it to five, 10, sometimes 15 different banks," he says.

From there, each bank responds with a loan approval and interest rate. That rate, known as ‘the buy rate,’ is the rate the lender is actually willing to offer based on the buyer’s credit profile. In the example Smith shows in the video, the bank approved the loan at 8.87 percent.

But according to him, the dealership can add an additional markup before presenting the final contract to the buyer. "So the finance manager takes that 8.87% approval," Smith explains, "and they can mark up the rate 2.5%."

The result is the higher rate shown on the buyer’s loan contract: 11.37 percent.

Smith says the bank pays that 2.5% back to the dealership as a commission called ‘dealer reserve.’

"It’s a kickback," he says. "It’s legal, but it’s still a kickback."

How Much Does The Buy-Rate Scam Cost You?

To illustrate exactly how this impacts buyers, Smith walks through the example he reviewed.

In the case he describes, a customer financed $46,869 over an 84-month loan. At the bank’s original 8.87% buy rate, the monthly payment would’ve been about $750, with total interest reaching $16,284. But the contract the customer actually signed used the higher 11.37% rate, which increased the monthly payment to $815 and pushed the total interest paid to $21,650.

"The difference is about $5,400," Smith says. He says this works out to about $66 more per month, an amount small enough that many buyers don’t question it. According to Smith, that’s what the bank relies on.

"The dealership is banking on you focusing on the monthly payment and not the total cost," he says.

Why Buyers Don’t Catch It

According to Smith, dealership financing offices rely on several psychological factors that make it easier for buyers to accept the higher rate. First, by the time buyers reach the finance office, they are often exhausted.

"You’ve gone through four hours of negotiating," he says, "You’re tired. You just want to get out of there."

Second, the finance office itself can create an impression of authority. "They’ve got diplomas on the wall, they’re wearing a suit," he says. "But the finance manager is still a salesman."

Finally, most buyers simply don’t know which documents they should ask to see. "You’ve never seen a bank call-back sheet," he says. "You don’t know what a buy-rate is."

Without that knowledge, customers may assume the rate presented in the contract is the rate the bank actually approved.

How Common Is This Tactic?

Many viewers in the comments section said they weren’t surprised by Smith’s explanation.

"That’s why they get mad when you take outside financing or pay cash," one commenter wrote.

Another shared a personal experience attempting to verify the lender’s original rate.

"The last time I purchased I asked for the bank sheet and they refused," the commenter said. "They told me they didn’t want my business."

Others said the story points to a larger issue with selling vehicles in the US.

"America doesn’t sell cars," one wrote. "They sell loans."

Do Dealerships Really Do This?

Yes, dealerships really do jack up interest rates and pocket the excess.

According to the Consumer Financial Protection Bureau, dealers and lenders aren’t required to offer the best available rates and may mark up the rate they receive from the bank.

What do you think?

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According to the agency, it’s a better idea to get quotes directly from lenders, compare several offers, and negotiate to secure the best possible interest rate.

Motor1 has reached out to Smith via email for comment. We’ll update this if he responds.

Finance Managers Are Hiding This Paper (Demanding It Saves $4,000)

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