HACKENSACK, N.J. – Car buyers are paying as much as $1 billion a year when auto dealerships mark up interest rates on their loans, a consumer organization said Monday.

Hardest hit are blacks and Hispanics, the Consumer Federation of America said.

Customers who expect they’re getting the interest rate set by the lender don’t realize that the rate includes “an undisclosed but widely practiced markup” at the dealership, the report said.

The extra percentage points add to the actual cost of borrowing money, and consumers end up paying for the markup – which is split between the lender and the dealer.

The markup can cost a car buyer an extra $1,000 over the life of a loan, the CFA said in a report published Monday, “The Hidden Markup of Auto Loans: Consumer Costs of Dealer Kickbacks and Inflated Finance Charges.”

The federation said the report is based on the findings of several studies.

But Richard Appleton, president of the New Jersey Coalition of Automotive Retailers, or NJ CAR, said the claims in the report are “scurrilous and wholly unsubstantiated.”

“Dealers arrange for the sale of certain products and services to consumers on which they earn a profit. That is not a kickback,” Appleton said. The allegations “sound like nonsense, don’t square with what I have seen in the automotive business. They fight mightily to place customers in contracts so they can sell cars.” Also, it is unfair to complain that the dealers didn’t disclose “exactly how much they make on every product they sell,” he said. “That’s a criticism that could be leveled at every business person on the face of the earth.”

The problem isn’t with the dealer making a profit, but with car buyers being misled into believing that that loan offered through the dealer is the best available, CFA Executive Director Stephen Brobeck said by phone.

The best rate is the “buy rate,” the amount the bank or car manufacturer agrees to, based on the consumer’s credit rating, he said. When that is marked up without a consumer’s knowledge, people are being exploited, he said.

The markups to minorities are often over and above the usual markups, Brobeck said. “They could not be explained by credit scores, credit worthiness.”

Not only are black and Hispanics more likely to be assessed a finance markup charge than will white consumers, but the amounts they face are higher, he said.

“I’m not sure that its conscious racial targeting,” he said. “They are making judgments as to who’s vulnerable to an overcharge, to go as far as they can go.”

Specific findings include:

-On new cars, blacks pay on average an annual rate of 9.01 percent, compared to 7.38 percent for all other households.

-Hispanics pay an average of 8.52 percent on new cars.

-On used cars, black buyers pay an average annual rate of 11.03 percent versus 10.15 percent for all others.

-Hispanics pay an average annual rate of 10.85 percent on used cars.

Rates are determined by the lenders, not the dealers, and result from a “complex calculation (of) a wide variety of factors,” Appelton said.

“There is absolutely no place in the retail automotive business for discrimination,” he said. “Dealers want to sell to everybody. New Jersey is a place that has everybody. Every group imaginable is represented in the marketplace, and dealers want to sell cars to those people.”

Dealership finance departments “overwhelmingly treat people fairly and equally,” he said. “Do they make money financing? Sure they do. It’s a professional service of the dealership.”

Although minorities appear to be most affected, undisclosed finance markups are an industry-wide practice, costing millions of consumers, the report said. And the $1 billion figure is a conservative estimate, Brobeck said.

“It could be as much as $2 billion.”

To avoid paying more in interest than needed, consumers should do comparative shopping at their bank or credit union before accepting an offer from a dealer.

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AP-NY-01-26-04 1811EST