How Car Dealer Financing Works
There are many ways to finance a new or used car but one of the most popular is dealer financing. It’s easy, convenient and getting financing at the same place where you buy the car means one stop shopping for both the vehicle and your loan. The finance department of a dealership is open whenever they are, so getting a loan after bank hours or on the weekend is just another advantage of using dealer financing. Here is a quick primer on how it all works.
Car Dealership Financing
Car dealers are in the business of selling cars, not making loans. While it may seem like you are financing with the car dealer, you are actually borrowing from one of the dealers preferred lenders. Dealers do not write loans but have a set of lenders they work with on a regular basis. Normally, the dealer will mainly work with the captive lender of the manufacturer; finance companies like Ally Financial, Ford Motor Credit or American Honda Finance. Basically when you finance a car at a dealership, the dealer is helping you with financial arrangements.
Car Loan Approval
Dealers also do not approve loans. They simply pass the paperwork onto the finance company and wait for the approval from them. While it may appear that all of the paperwork is being done at the dealership, in reality it is being faxed to their financing partners for approval. You will deal with a person at the dealership but the actual financing will come from a completely different company.
A dealer may choose to pull a credit report early in the car shopping process. This is simply a way for them to ensure that you can theoretically qualify for the vehicle you in question. This report in no way means you will be approved for a loan. They want to avoid spending hours looking at expensive sports cars with a person whose credit rating will keep them from getting financing.
Dealers can determine your interest rate. It is legal for them to add a point or two on to the finance companies interest rate and pocket this money as profit. They justify this as a fee for helping you with your financing. These points are negotiable and you should ask the dealer if they have added points to the rate.
There are some advantages of doing your auto financing with a dealer. Convenience is the number one advantage. You can shop for a car and finance in the same place, at night or on weekends. Dealers can also offer excellent interest rates and other manufacturer incentives. Dealers work with the manufacturer financing arm and are able to pass on their specials and corporate programs.
When looking for financing it pays to shop around. Check with your bank, a local credit union and other financing companies. Consider all of the loan terms, not just the interest rate. Read all loan documentation thoroughly and ask questions if you don't understand something.
Sometimes, it’s costly. Interest rates through auto dealers can be competitive with banks and credit unions, but many times, they are more costly. Even if the difference seems minor (e.g. 6.9 percent versus 5.9 percent), it can add up to a substantial sum over the course of an auto loan. One of the reasons they are often more costly is because dealers tend to “mark up” or “add points” to the initial interest rate offered by the financial institution they are working with. This is certainly not unethical, nor is it illegal; it’s simply a commission for arranging the financing.
Using dealer financing is convenient and can be an excellent deal. Check around before committing to any financing deal.