Can a dealership force me to finance my vehicle?

We’re shopping for a new SUV because our previous one was written off after someone slammed into it while it was parked on the street. Miraculously, we found a dealer with the one we wanted in stock, but when we went to buy, we were told that we would have to finance through the dealer and we would have to sign a letter saying our credit card would be charged $1,000 if we paid off the loan early. We’d planned to use the [insurance] settlement and our line of credit – which has a much lower interest rate than they’re charging – to pay cash for the vehicle. Are dealers allowed to do this?

Sam, Calgary

There is no rule barring dealers from forcing you to finance your car through them – but they can’t punish you for paying off the loan early, Alberta’s dealer regulator said.

… While the rules vary by province, no jurisdictions explicitly ban forced financing, said George Iny, president of the Automobile Protection Association, an automotive consumer advocacy group with offices in Toronto and Montreal.

… So why do dealers want to force you to finance through them? Simple: They get a commission from the banks and finance companies, the APA’s Iny said.
“The dealer can get $1,000 and up [in commission], depending on the price of the vehicle,” Iny said.

But if the buyer pays off the loan early – typically within the first six months – the bank will ask the dealer for the commission back, Iny said.

Because the dealer doesn’t want to lose that commission, the dealer will either ask you for a postdated cheque or they’ll demand you preapprove a charge on your credit card that offsets the commission they’d have to return, Iny said.

“If you pay off the financing early, then they’ll cash the cheque or run the charge through,” Iny said.

While you can back out of any deal before you sign the purchase agreement, some dealerships have sprung the forced financing on customers when the vehicle is delivered – sometimes months after they’ve signed the deal.

So what is the recourse? You could file a small-claims lawsuit for the penalty they charged, Iny said, adding that he is not aware of any cases where this has happened.

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