What is a buy rate on a car loan?

What is a buy rate on a car loan is the interest rate a lender quotes to the dealer when you apply for financing through the dealership. The Consumer Financial Protection Bureau, in its explanation last reviewed on January 30, 2024, calls the rate the dealer then offers you the contract rate. The contract rate may be higher, so the dealer is paid for arranging the loan. You pay the contract rate. The gap between the two is the rate markup, also called dealer reserve when the lender shares that gap with the dealer.

This is United States dealer-arranged financing, as the CFPB describes it. Other countries’ car finance does not use this buy-rate sentence. A money factor on a lease is also a different price. It is a lease convention, not the APR on a retail installment loan, and this page does not convert one into the other.

Buy rate versus sell rate

“Buy rate vs sell rate” is the phrasing people type. The CFPB’s word for the sell rate is contract rate: the APR on the paper you sign. The buy rate is what the lender told the dealer it would accept for that application. The dealer may offer you something higher. The difference is compensation between the dealer and the lender. It is not always a separate line you can see, which is why the two rates can differ even when only the contract APR is printed on the page in front of you.

The CFPB’s auto-loan guide says dealers are allowed to charge more than the buy rate as compensation for connecting you and the lender, and that you may be able to negotiate. It does not say every dealer marks up every contract. This page does not say that either. It says the two rates are not synonyms. An APR that matches a direct offer from a bank can still be a marked-up buy rate, or it can be the buy rate itself. You cannot know which from the payment alone.

What you actually pay

The APR on the retail installment contract is the Truth in Lending disclosure of the cost of that credit. It is the rate that prices the amount financed, including add-ons the contract rolled in. A service contract, a gap waiver, or an aftermarket product increases the amount financed and the finance charge. A low advertised payment can hide a longer term, a larger amount financed, and a contract rate above the buy rate, all at once. Negotiating the monthly payment without reading the APR negotiates the wrong number.

Here is the gap in dollars, using the same monthly method as the rest of this site, APR divided by 12. The default is $30,000 for 60 months at 6 percent versus 8 percent. Change the numbers. The figures are an illustration of the rate difference, not a quote.

What the markup costs

extra interest = interest at contract APR − interest at buy rate

Amount financed $ Term months Buy rate % Contract APR %

The contract rate costs more interest

$1,698.60

Buy rate payment

$579.98

Interest $4,798.80

Contract payment

$608.29

Interest $6,497.40

APR divided by 12, a level payment, for the full term. An illustration of the rate gap, not a quote. Nothing you type is sent.

Two percentage points on that default loan is about $1,700 of extra interest. A one-point gap is smaller and still real. The CFPB’s point is that shopping a bank or credit union before you are in the finance office gives you a number to put next to the contract rate. If the dealer’s APR is higher, the gap might be reserve, a different lender, a different term, or all three. Ask which. The guide suggests asking whether the dealer will offer a lower rate, and showing the outside quote.

What the buy rate itself depends on

The lender’s quote reflects how that lender reads the credit file, the term, the vehicle, and the down payment. A lower score tends to mean a higher buy rate before any reserve is added. That is the lender’s pricing, not the dealer’s. Cleaning an inaccurate item on a credit report is a dispute, not a request the dealer will “use a different bureau.” An accurate negative item can still be in the file, and the buy rate can still reflect it. Nothing on this page assigns a point value to that item or a rate cut to a dispute.

Add-ons are the other quiet increase. If $2,000 of products are financed on top of the vehicle, every rate, buy rate or contract rate, is applied to a larger balance. The monthly payment may move less than you expect because the term is long. The total of payments moves by the extra principal and by the interest on it. Read the amount financed in the disclosure. If it is larger than the price you agreed for the car, the difference is in the contract, and it will be financed at the contract APR.

How this sits next to other rates on this site

The contract is where the markup becomes real, and it is readable without the dealer’s vocabulary. For a closed-end loan, Regulation Z calls for a disclosure of the amount financed, the finance charge, the APR, the payment schedule, and the total of payments. The finance charge is the dollar cost of the credit. The total of payments is what you will have paid if you follow the schedule. Two contracts with the same amount financed and the same term, one at the buy rate and one two points higher, will show different finance charges and different totals. That difference is the price of the markup, in dollars, over the life of the loan. On the $30,000 example above it is about $1,700. A one-afternoon negotiation is about that number, not about whether the payment “feels” close.

Signing fixes the contract rate. Asking for the buy rate the next week does not reopen the APR. A later refinance is a new loan, with a new credit pull, a new term, and sometimes a fee. Whether that new loan saves money is the consolidation question, not a correction of the contract you already signed. If the rate in the box is higher than the rate you were quoted by a bank or credit union, the time to say so is before you sign.

A car loan is an installment contract. It is not a credit-card daily balance, and it is not a consolidation loan unless you later roll it into one. How card interest is calculated is a different day-count, in how credit card interest is calculated. Whether replacing several debts with one new loan saves money is does consolidating loans save money. The car-loan question is narrower. Before you sign, the rate that matters is the contract APR. The buy rate matters because it tells you whether that APR includes a markup. If you cannot get the buy rate, an offer from a lender that does not go through the dealer is the other way to see a rate with no reserve in it.