Car Dealership Financing Guide

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November 9, 2016

Compare the pros and cons of a car dealer loan to financing through a third-party lender, and learn how to tell if you're getting the best terms.

Spending some time researching a car dealer loan is a wise move if you are looking for the best loan terms. Through a car loan lender at a dealership, you could be getting a great deal if there is a rebate, but that is not guaranteed. Knowing this, you should investigate all of your car loan options before going to the dealer. When you exhaust all of the auto loan lender choices, and have been pre-approved by a few of them, then it is time to head to the dealership. You will be able to better negotiate terms, and you won't be talked into signing an unfavorable lease or purchase contract.


Before you do anything, determine your budget. You don't want to start by picking out the car of your dreams, only to have your financing application rejected due to an insufficient down payment or the inability to pay back the loan. If you are realistic from the outset, determining what you can afford, you will not be let down when you think you should be driving off the lot. Another wise step is to acquire a copy of your credit report. When financing a car, it is good to know exactly what the finance company thinks of your status as a borrower. These 2, budget and credit score, go hand in hand, and should be a part of your preparation for car finance.

Get Pre-Approved

One of the best things you can do is get pre-approved for car finance before you ever set foot in a car dealership. Call your bank or credit union, inquire about the current finance rates, and get a quote. You can find a long list of third party lenders online who will also give you quotes. Remember, you do not have to apply for anything at this point, but getting pre-approved is like an ace in the hole when you step into the dealership. Dealers don't actually finance. They have arrangements with any number of financing agents who they check with to determine a potential customer's financing. An unfortunate part of the business is that dealers have the authority to add a certain percentage on top of the rate quoted by the finance company. This is profit to the dealer, and you are stuck with the extra interest. Naturally, you would do well to refuse this kind of service, especially if your credit is good. Arm yourself with at least 3 quotes from third party lenders, and be willing to walk away from any dealer who can't or won't meet them.


Researching your options is your greatest ally when you are in the market for car finance. When you factor in rebates, car dealer finance might very well be your best bet, but you should check all of your options first so you will know for sure.

For some drivers and consumers, a dealer's lot is the perfect place to finance their vehicle. The dealer's philosophy on financing also has some common sense reasoning behind it. Here are some of the reasons that a driver might choose to finance a vehicle directly with the dealer.

Face-to-face contact - Although a third-party lender can be a resource for a potential car buyer looking for the best rates, there is often not a lot of face-to-face interaction between that lender and the consumer. More and more third-party financing takes place online or over the phone. Some buyers are not entirely comfortable with this process. They would rather go down to the lot, sit down with the dealer's representative, and ask them point blank about what kind of financing they can pursue. Some customers will even forgo the best rates in order to get this personal connection.

A one-stop shop - Another reason that you might choose to finance with the dealer is that you are already visiting in order to buy their vehicle. With little time to get things done, one-stop shopping can be extremely important, and even with dealer markups for financing, you might be attracted by the convenience of financing where you buy.

Return business - Dealers want return business, and they will work hard to get customers into a financing agreement that they can afford. Of course, this depends on the dealer's philosophy. Some dealers like to sell the same customer several cars over several decades, and others just want quick turnover for the inventory on their lots. When a customer forges a long-term relationship with the dealer, they may be apt to choosing the dealer's financing options.

Choosing a vehicle - Many third-party lenders want to see vehicle information up-front. They ask for the year, make and model, and in some cases, even the vehicle identification number, before signing. In contrast, a dealer should be able to offer financing on any vehicle that is on the current lot.

Disadvantages of a Car Dealer Loan

Many drivers may feel that it is entirely natural to go to a dealer's lot and get car dealer loan financing on a vehicle straight from them. However, as many financial experts will tell you, there are some very good reasons to explore other avenues for auto financing.

Car dealers deal in cars - A car dealership is not primarily a financial institution. The objective of the dealership is to sell cars, and to profit from each sale as much as possible. That means the dealership may not have as much incentive in offering the best financing terms or auto loans, as a lender such as a bank or credit union.

No connection - A potential car buyer going to the dealer's lot has no established history with the dealership (provided the buyer has not bought a vehicle there previously). In contrast, lenders such as banks and credit unions may already have a consumer "on the books" through a savings or checking account, or other connection, that may facilitate better communication and better lending.

Car lot pressure - To many drivers, a dealer's lot is a hectic place. The process of negotiating the sale of a vehicle is complex. There's no need to make it any more challenging than it already is. Financing with a dealer just gives the dealer's representative more opportunity to present some kind of sleight-of-hand and raise the total sale price with a combination of extra charges, extra financing fees, and extra interest. This is a case for getting loan pre-approval before visiting the dealer's lot.

Dealer reserve - It's a little known but frequent practice of dealers to pad their pockets when assigning interest rates to auto financing deals. Some in the business referred to this as "dealer reserve." Whatever you call it, it is essentially a mark-up. Remember, the dealer is a third party between a lender and a borrower. As a middleman in the process, the dealership may right to mark up interest rates in order to line their coffers.

Essentially, borrowers who finance a car at the dealer's lot are often just engaging a third party in the deal, and one that may not have their best interests at heart. That's why so many potential car buyers choose to finance their vehicles through outside sources before stepping onto the lot.

How to Know if Car Dealer Loan is the Cheapest Option

There is a way you can estimate whether the amount you're financing is the cheapest way to do it.

Rule of Thumb

As a rule of thumb, car sales managers base their auto dealership financing assumptions on the following: a 5-year loan term, at between 11 and 15 percent interest. This works out to a rough figure of about $22 per thousand in loans. This means that if you are planning to purchase a $15,000 vehicle, they allow you $4,000 for your trade-in, and you put down $1,000, you will be financing $10,000. Using the rule of thumb, this means your monthly payment will be roughly $220. (This is a simple example because there are other fees that complicate things rapidly and make things confusing.)

If you are approved by your credit union for a loan at 14 percent, then the figure is closer to $30 per thousand, so now your monthly payment is $300. If you are approved for a so-called bad credit loan, with interest at more than 20 percent, then you're looking at about $35 per thousand, and your monthly payment will be about $350. It keeps going up, and it makes the car dealership auto loan very attractive.

Even More Savings Possible

When you work with a dealership and they can keep it in house, using their own finance arm, you may be able to save a few dollars. One of the best reasons this makes sense is that from time to time the business office and the automaker's finance arm will announce sudden loan promotion specials. You may find you have walked into the middle of a major savings that you never would have known about had you not been using the dealership's loan program. You may be able to pick up your car with a zero percent loan.

When you look it over thoroughly, the dealership has all of the advantages, and it pays for you to take advantage of them. After all, it isn't every day of the week when you can save several hundred dollars just by walking into a finance office.

Auto Dealer Markups

Auto dealer loan markups happen when purchasing your car through a dealer. If you walk in to the dealership armed with this information, you are less likely to end up paying some of these additional and unnecessary charges. For instance, the lender might approve you at 5.9 percent. Your loan terms will only show you the rate that the dealer is writing on your contract, for example 7.9 percent. The dealer makes this markup as an additional source of profit on the deal, often making more than the profit on the car itself. The finance manager who does the paperwork gets paid a commission on this markup.

An auto dealer can also create a similar markup on leases. The "money factor" can be marked up just like an interest rate. To make sure you are getting the best rate, bring in a letter of approval from your credit union or a blank check loan, showing you know the exact rate you have been offered. Ask the dealer to show you your approval letter from the lender that they are using, if your suspect they are trying to add a large markup. These markups, plus profits from extended warranties and other products are what is known as the "back end" of the deal.

Look for Market Value Markups

If you are looking for a car that's in high demand, or there is a waiting list for the car you want to purchase, be prepared to negotiate over the extra "market value" premium. Basically, if a car is in high demand, the dealer knows they can add several thousand dollars to the sticker price and still get it. If you see anything about market value, know that you are about to be charged more.

Avoid Additional Charges

Dealers love these items. Things like rust-proofing and undercoating are definitely something you want on your car. If you live in an area that is close to a coast or very humid, they push this even more. Paint and fabric protection also sounds like a good idea. These protect your paint and make it look new for even longer. Fabric protection is great if you have kids, so spills won't stain as easily. What most people don't know is it has already been applied at the factory. The dealer is going to charge you an extra fee to re-apply these things, knowing you don't realize it's already there.

Forego Extra Security Features

Naturally, no one wants their car stolen. Dealers know that anti-theft systems are in high demand for anyone who buys a new car. Etching is a process of scratching the VIN number into each of the windows. This way, a thief would have to replace all the windows if they want to sell the car. But you can do these things outside the dealership, and save as much as $800 on average.

You should never talk to a salesperson about what payment you can afford. Know in advance what price on a car and what interest rate will give you an affordable payment, and aim for those terms. Avoid telling the dealer a particular payment. When the salesperson is negotiating with the buyer, he or she will ask what the customer can afford in monthly payments. Instead of offering the customer the rate they should receive, the financing company raises the rate until they reach the maximum the customer can pay in monthly payments.

Captive Finance Companies Special Offers

With today's car company crisis and poor economy, car manufacturers are doing everything they can to increase sales and revenues. Many car companies are offering very attractive interest rates on loans. Not everyone, however, will be able to qualify for these loans. Special offer interest rates, such as the ones you see on the commercials, are generally reserved only for those with the best credit. However, if you do have good credit, you will be able to take advantage of some low interest rates.

Increase Your Down Payment

When you increase your down payment, you will be eligible for better rates, no matter where you choose to finance a vehicle. The reason for this is quite simple--the lender's risk has been lowered. When a lender loans an amount on any vehicle that is much less than the vehicle is worth, the lender feels much more secure in making the loan, and also in offering a better interest rate. A lender's risk will always determine the interest rate that the company offers. When you reduce their risk, they reward you with a lower rate. In short, more money down means a lower interest rate.


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