Auto financing can be tricky to finesse

Low-interest financing offered by auto manufacturers has drawn millions of Americans into showrooms and helped to sustain the industry through a weak economy in recent years. But consumer advocates say that many of those supposedly low-interest loans carried deceptively higher interest rates and that the worst abuses were targeted at racial minorities.

Nissan Motor Acceptance Corp. tentatively agreed last week to pay as much as $7.6 million to settle allegations that Nissan dealers routinely boosted interest charges for African American and Latino customers by as much as 4 percentage points over what the manufacturer’s credit arm was offering, even when the buyers had top credit ratings.

Although whites also were subject to the practice, the case, filed in U.S. District Court in Nashville, alleged that it affected a far higher percentage of blacks and Latinos. Moreover, interest rate charges were boosted by a higher average amount for minorities than for whites, according to the suit.

The Nissan case is the first to reach a settlement or verdict, but it is not unique. The financing arms of other major automakers have been hit with similar suits, including those at General Motors Corp., Ford Motor Co., DaimlerChrysler and Toyota Motor Corp. The Nissan suit was filed in 1998 by the National Consumer Law Cen- ter in Boston and by Clint Watkins, a Tennessee consumer attorney.

Such cases demonstrate the tricky terrain of showroom negotiations, not only for the new vehicle itself but also for the financing to pay for it. A poorly informed buyer may save hundreds of dollars on the price of a new car or truck but give up thousands of dollars on a loan package, consumer groups say.

Nissan denied that it discriminated against minorities and said its practices were a “lawful byproduct of competition,” according to court documents.

Nonetheless, the company agreed to remedies that should help customers, because its dealers for the first time will have to disclose that interest rate charges are negotiable -- essentially acknowledging that they arbitrarily jack up interest rates in the showroom as a way to increase their profit.

Also for the first time, there will be caps on how much dealers can increase those interest rate offers at the local level beyond what the manufacturer’s financing arm is offering.

Nissan further agreed to steps aimed at helping the affected minorities, including a pre-approval loan program that will eliminate all markups for 675,000 minority customers.

But the damages Nissan agreed to pay are far below the early expectations for the case, said Rosemary Shahan, executive director of Consumers for Auto Reliability and Safety, an advocacy group based in Marysville, Calif.

Shahan said the class-action suits against the industry were gutted by a ruling in the U.S. 6th Circuit Court of Appeals in Cincinnati in 2002 in a case involving General Motors Acceptance Corp. The court dismissed monetary damages for broad classes of minorities and said any settlements could provide only for remedies to industry practices.

The GMAC ruling took the wind out of the Nissan suit, which had sought hundreds of millions of dollars in damages. The tentative settlement disclosed last week provides $60,000 for 10 named plaintiffs but nothing for the much larger class the suit represented. The balance of the award would go to about two dozen attorneys who have spent six years financing the case.

Shahan and other consumer activists blame the Bush administration, in part, for what they consider to be a weak Nissan settlement and the uncertain fate of the other suits. The Justice Department had intervened on behalf of consumers in the Nissan suit under the Clinton administration, but the Bush administration has backed away from that support, Shahan said.

The Nissan suit is a cautionary tale for anyone buying a car or truck, though protecting against excessive charges remains a challenge. Comparison shopping is not always effective, because the complexity of some deals makes it difficult to weigh rival offers.

For example, a buyer who seeks a model with specific equipment and wants to trade in a used vehicle may have so many variables affecting the loan package that it would be difficult to compare offers, consumer experts say.

One approach is to separate each element of the deal -- selling the used car to a different dealer or to a private party and arranging financing from an outside lender.

This can give the buyer a stronger negotiating position in the showroom, though it is more work and may require more time to close the deal.