The Feb. 21 column by Stephen Brobeck of the Consumer Federation of America ("Finance reserve should be dumped") demonstrates a fundamental misunderstanding of the nature of dealer financing. Brobeck's arguments are based on false assumptions that inevitably lead to a flawed conclusion.
Brobeck assumes that retail car buyers can borrow funds at the same wholesale interest rates that are quoted to dealerships if those buyers would only go directly to lenders. But that's not the case.
The wholesale rate that finance sources quote dealerships cannot be made available to consumers on a sustained basis. No business can make retail sales at wholesale and expect to stay in business for long.
That can be seen most clearly in the case of the manufacturers' captive finance companies. The captives have no retail infrastructure of their own. They depend on dealers, who have invested millions of dollars to build and maintain businesses that include retail credit offices at more than 21,000 dealerships in the country.
In the case of banks and credit unions, they have a retail infrastructure through which they offer loans at retail rates. But they also choose to offer auto financing through dealerships because they recognize that dealerships provide an efficient, alternative distribution channel. It is a cost-effective way to keep their infrastructure expenses down while increasing market share. Also, if banks didn't offer the wholesale rate to dealers, there would be no incentive for dealers to sell the banks' loan products.