Finance charge markups can make any new car or truck more costly

Red car on calculator

Auto loans have never been cheaper.

The average cost of financing a new car or truck has fallen to about 4% with a 36- 48- or 60-month loan, according to our most recent survey of major lenders.

But if you don’t know that, you could wind up paying too much or even be taken in by a finance charge markup.

That's when the dealership adds 3 percentage points -- sometimes more -- to the interest rate one of its lenders is willing to charge you.

Here's how it works: You apply for a loan through the car dealership, which sends your information out to four or five finance companies it regularly works with.

They check your credit history and come back with an offer.

One bank or finance company says you're eligible for a loan with a fairly average 5% annual interest rate. Only the car dealer tells you the rate is 8%.

You don’t know any better, so you sign on the dotted line for the inflated interest rate.

If you’ve borrowed $20,000 over five years, that extra 3% adds nearly $1,700 to your payments.

The lender collects that extra money as part of your monthly payments and sends at least half of the finance charge markup back to the dealer.

That's why it's critical for you to know what the typical auto loan costs.

An even better idea is to have financing lined up before you ever go car shopping. If the dealer’s finance guy can beat it, great. If he can’t, you can close the deal knowing that you’re paying a competitive interest rate.

Our database of the best auto loan rates is a good place to start shopping for a car loan.

Finance charge markups are just one of the ways auto dealers try to take advantage of unprepared customers.

Check out the 8 tricks up your auto dealer’s sleeve to avoid many of those extra costs.

Join all of the savvy readers following on Twitter and Facebook.

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