Bailouts of the banks and the auto companies went together, although the banks took more taxpayer money by several orders of magnitude than the car manufacturers. Dealerships around the country have been shut down as the economy has sunk, despite the government's subsidizing of car buying and car destruction through the "Cash for Clunkers" program.
In the aftermath of the program, car buying came crashing back down to reality. Without government to subsidize car buyers, many people stopped buying them after the Cash for Clunkers program ended. The program was always a plan to hand over a few billion more dollars to the banks as people took out more loans for vehicles.
But now, lenders have begun to insert themselves more directly into the car buying transaction through the use of add-on sales and costs. As dealers have been starved for credit to offer borrowers, lenders have begun to get in on this action, especially because add-on costs can more easily be hidden from consumers and offer greater profit opportunities.
In the past, banks set an upper limit regarding how much money they would finance for add-ons. But these were add-on costs that were imposed by the dealers and car companies. With banks not getting into the add-on business, they are more willing to increase the amount that people can borrow to pay for these expenses.
In fact, some lenders have begun offering dealers more money if the dealer includes an add-on that is offered by the lender instead of a third-party. In the case of GAP insurance, for example, a bank may offer to finance $700 of their plan, while only offering $500 to finance a competitor's plan. For the bank and the dealer, it makes more sense to include the $700 policy.
Another issue may involve a bank refusing to finance a competitor's plan at all. Whether or not it is less expensive than the bank's plan or is better for the consumer or not, the lender may not be willing to finance the competitor's add-on at all. Thus, car buyers must be careful that they are not being forced to overpay for a service.
Finally, banks may go even further and require that their add-ons be included by the dealership, or else they will not finance the purchase at all. This is the most extreme way that banks have begun to include extra profits for themselves in car purchases, and buyers should be careful to watch out for evidence of such deals between the sellers and finance companies.
With all of the new involvement by banks in the add-on business, the deals themselves may expose the lenders to more liability under various laws. Truth in Lending laws will come into play if the add-on is required as a condition of financing, for example, and state UDAP statutes may prohibit creditors from such requirements.
As always, when it comes to the banks, buyers should be careful to make sure they are not being taken advantage of in any less-than-obvious way. With banks attempting to get a piece of the add-on action, it may be better for the majority of car buyers to purchase used cars from private sellers or pay for a vehicle with cash. Can we trust the banks to deal fairly in a car buying transaction?