You Should Never Finance From A Dealer
There is only one reason that you should ever finance through an auto dealer. If you have excellent credit and are purchasing a new vehicle at 0 percent interest. There are very few people with the credit to qualify for one of these offers however. That means for most people, avoiding the dealer finance department is best. Let’s find out why.
Dealers Make Money Off The Back End
Most people are completely unaware about how a dealership makes money. It is not all about the sales price. Your dealer makes thousands of additional dollars off of the back end of an auto deal and this includes the financing. They can do this by padding the interest rate. Here is how it works.
You go into a dealership and find the car of your dreams and then work a deal. You then fill out the finance form and your dealer will get offers for you. You might think that they are just trying to get you a good financing deal, but this could not be further from the truth. The offer that they will give you is not the best rate that you qualify for.
Your dealer will take a financing offer and pad the interest rate. The bank might have offered you a 7 percent rate, but the dealer will present the rate as 9 to 10 percent. This extra interest will go directly into the dealers pockets.
On a 20,000 dollar loan, adding 2 percent to the interest rate will make the dealer 1100 dollars. If they get you to pay an extra 3 percent, they will net roughly 1600 dollars. Not a bad way to pad their pockets.
Getting You To Accept Higher Interest
Auto dealerships are master manipulators. They know that most people have no idea what kind of interest rate that they should expect. This allows them to make an offer that is high, but might actually make you happy. You might be ecstatic about a 9 percent rate on a used car, not realizing that your credit actually qualifies you for a 6.5 percent rate.
If you have a few dents in your credit rating, it gets even worse. They will run your credit and then zero in on these imperfections. That late pay you had three years ago is likely not harming your credit much, but they will make it seem like it is the end of your financial world. That allows them to bump your rate more, all the while making you excited about the great offer they were able to get you.
Those auto dealers can be tricky, but there is a way around all of this.
Get Pre Approved For Financing
In this day and age, there is never a reason to not get pre-approved for financing. Credit issuers such as Capital One allow you to get approved for a loan without it even affecting your credit score. They will then give you an approval number which you can take into the dealership with you.
When you get an approved offer at the dealership, this gives you a lot of power. You will know what kind of deal that you are capable of qualifying for and you can then give the dealership a chance to beat it. More often than not, they will do just that and you will receive an excellent rate on your vehicle.
Even if they can not beat the rate, it is worth letting them try. It will assure you that you got the best loan possible.
Oops I Forgot To Get Pre-Approved
So, what should you do if you forget to get a pre-approval. Perhaps you did not plan to go to the dealer or were not that serious about getting a new car until you had a deal worked out. Are you just going to get ripped off? Should you walk out?
No, you can still work a financing deal with the dealer, but you should know that you will be at a disadvantage. They have the information and all of the experience on their side. Here is what you need to do.
Send The Offer Back
First, never accept your initial offer. It will almost certainly be padded with dealership money. If they offer you an 8 percent rate, say that you were expecting a 6 percent rate and that you will not accept the higher interest. It never hurts to send the offer back and they will likely come back with a better offer. Usually the story is that they “called the bank” and got the rate reduced.
Get An Extended Warranty
Another option is to turn their greed against them. Ask if “the bank” will give you a better rate if you get an extended warranty. In case you did not know, they make a lot of money off of warranties and the dealer will see this as an opportunity to make their back end money. If they agree, you get the lower interest rate and they sell you a warranty for 3000 dollars and make a killing, sort of. Most warranties can be easily cancelled. What you then do is turn around and cancel the warranty within 30 days for a full refund. The money is returned to the lender and taken off of your balance.
Plan To Refinance
One last option is to simply plan on refinancing your vehicle loan. Accept the financing that the dealership offers you and then simply refinance with a local credit union once the deal is done. Just be sure to refinance as soon as possible to avoid paying the higher interest for more than a month.
One benefit to this method is that you may be able to work a better deal on the sales price. For example, you can agree to the higher interest rate, but you need an extra 500 dollars off of the sales price. You get a better purchase price and, eventually, the rate you like with your local bank.
