Q: I was purchasing a used vehicle from the dealership. Before signing, I reviewed the conditional sales contract and found that they were charging me a $2,800 "acquisition fee"? What is this? What is a reasonable amount?
A: An “acquisition fee” or “bank fee” is the amount the lender requires the dealer or borrower pay to fund an auto loan. Sound odd? These fees are most common in auto loans for subprime borrowers. (Read more about your credit score here.) The problem comes when these fees are not disclosed and capitalized or built into the loan or lease where they go unnoticed.
Theoretically, this non-interest, fee compensation is introduced by the lender to take what they perceive as being abnormal risk on a subprime auto loan. For example, you have a 550 credit score with a recent repossession. You go to a dealer who finds you a car. He shops your loan application but can’t find willing lenders, but he has a relationship with a lender who only lends to people with 600+ FICO scores AND has a maximum interest rate of 15.5%. The dealer convinces the lender to underwrite your loan (buy the loan from the dealer), but the lender requires more upside for his perceived risk. That upside comes in the form of acquisition fee income. (Read more about working with used car dealers here.)
How it works and how to reduce or eliminate it...
How does it work?
Explicit car loan bank fees: The dealer adds the acquisition fee as, hopefully, a discrete fee charge on your conditional finance contract effectively “capitalizing” the acquisition fee. This means that the amount of the acquisition fee is added to the total amount borrowed and, therefore, the amount you must repay. When you sign you agree that the $1,000 addition to your purchase price should go to the lender for this purpose. But, unlike other monies from the loan that are distributed to the dealer for the purchase of the car, these amounts are withheld by the lender. (Read more about used car loans here.)
Implicit car loan bank fees: The lender advances the dealer less than the approved loan amount. The dealer may choose to accept $1,000 less for the car taking the acquisition fee out of his gross margin. If you’ve ever heard a dealer say “It’s going top cost me $1,000 to get this loan bought”, he’s referring to the lenders acquisition fee. Alternatively, the dealer may find a way to “bake” the $1,000 acquisition fee into the price of the car. Dealers particularly experienced in subprime finance may bake an expected acquisition fee into the car’s price before passing it to the lender for approval and funding. (Run the numbers for your auto loan with our auto loan calculator.)
So why do I care? Make no mistake, whether the auto loan acquisition fee is implicit or explicit, you are the one that is paying off this principal addition over the life of the loan. Further, because this bank fee is capitalized (included in the loan principal amount) you actually pay interest on the acquisition fee over the life of the loan.
How can I spot car loan acquisition fees?
Do your homework on the car you want to buy. Negotiate the terms of the auto purchase before stepping into to the F&I office.
Ask the dealer if the lease or loan he is offering has auto loan acquisition fees and if this fee has been capitalized. Always get the dealer to account for every penny of the cash required at signing and the monthly payment.
Study your loan documents and conditional sales contract carefully before signing. If you see an unreasonable loan acquisition fee included, or see that the price of the car has gone up, or see that the loan amount you are borrowing is not equal to the difference of the previously state price less the down payment you are making, don’t sign. Ask the dealer to explain any discrepancy.
If the dealer tells you it is due to an auto loan acquisition fee, ask for the lender’s contact information. Confirm the terms of the deal including acquisition fee with the lender.
If the fee seems unreasonable, take the terms provided you by the dealer’s lender and see if you can’t beat them by
What is a reasonable acquisition fee? Theoretically, any fee to which both buyer and seller agree is reasonable. As a practical matter they can range from several hundred to a thousand dollars depending on the amount and term of the loan, your credit score, etc. In one recent case, however, we heard of a $2,800 acquisition fee on a $25,500 loan for a borrower with a 640 credit score. This is excessive.
So acquisition fees are bad, right? Not necessarily. When it comes to money we are all inclined to think of the dealer or the lender as a adversary because they are making money off us. The fact is that many, many subprime consumers would not get financed were it not for acquisition fee. Our point here is not to disparage dealers or lenders who charge acquisition fees, just to point out that should know about any acquisition fee you are charged so that you are able to shop for alternatives particularly using sites such as