Why Auto Loans from a Dealership is a Bad Idea

Financing your new or pre-owned vehicle through a dealership is never as great a deal as they would have you to believe. Dealerships sell the idea of convenience by offering the complete car buying experience. They help customers select a vehicle, help provide the financing, and offer extended warranty protection. But in reality, dealerships earn more from financing and warranty protection than they profit from the sale of the vehicle.

The entire car buying process is designed to earn profits for the dealership. Car dealerships do not finance vehicles. They offer financing through a variety of lenders, including the financial arm of the brand manufacturer, local lending institutions, and financial institutions that specialize in automotive financing. Dealerships earn money for selling financing, and unsuspecting customers who do not negotiate the interest rates end up paying dealerships an extra $400 to $2000, depending upon the credit rating of the customer.

Auto manufacturers entice prospective customers in one of three ways. They will advertise a low monthly payment, a large manufacturer’s rebate, or low interest rates. Interest rates as low as zero percent are not uncommon. But, few people read the fine print, which usually states that customers must either choose the low interest rate or the rebate, which can also be applied as a down payment.

Zero percent interest is generally offered for shorter periods, like 24 or 36 months. Buyers must first have exceptional credit to qualify for such a low rate, but must also invest a considerable down payment to keep monthly payments in a comfortable range. Those who accept rebates and apply them as a part of the down payment will not receive the preferred interest rate, and must also produce significant down payments in order to lower the monthly obligation.

Dealerships actually prefer that buyers opt to take the rebate, and then accept financing through one of their lenders. This way, they can “buy” an interest rate at one point, then “bump” the rate to earn extra fees from the lender. This is why automotive salespeople “sell” monthly payments instead of vehicle price. They will also ask a buyers permission to pull a credit report to see just what rate the buyer qualifies for. The higher the rate, the lower the payment offered to the customer.

The best way for perspective car buyers to keep from being taken for a ride by a dealership is to arm themselves with information. Check with your bank to see what type of terms and interest rates they offer. Ask for a pre-approval letter to take to the dealership. Ask to see the dealers invoice on the vehicle being purchased, and negotiate from the bottom up (dealers cost), instead of from the MSRP down.

When asked by the sales staff what type of monthly payment you’re interested in, let them know that financing is already in place. Do not give your social security number to pull credit, because they can learn all of your pre-approval information. When meeting with the business manager, ask what rates he can offer. When he asks for your social security number to give you “the closest possible payment”, give him a range of your credit score. For example, ask “what rate would I qualify for if my credit score is between 680 and 700?” This motivates him to give the best rate available without adding anything extra. At this point, he wants to be as competitive as he can possibly.

Financing through an institution where a relationship is already established should be preferred, but it doesn’t hurt to find out what interest rates the dealership can offer. Being better informed gives the buyer more control over the entire buying experience.