It’s easy to finance your car at the dealership. Dealers encourage you to do it at the time you are buying a car from them. You get one-stop shopping, with no extra work involved. What could be easier? The real question you should be asking yourself is this:
Is dealer financing the best option for me and my finances?
Let’s take a closer look at what car financing is, how it works at a dealer, why dealers want you to finance your car with them, why you probably shouldn’t, and a better way to finance your car at the lowest possible cost.
What car financing is
Let’s face it, a car is a major purchase. Most people are unable to pay cash for one. The most common solution is for the prospective car buyer to apply for and get a loan to cover most or all of the purchase price of the vehicle.
The lending institution (which can be a bank, a credit union, or other entity) that approves the loan sends the money to the dealer and you get the car, along with several years’ worth of monthly payments to make. To compensate the lending institution for the risk it is taking, a certain interest rate is added to the payments. The interest rate will vary based on the term of the loan, your credit score, and the individual lender. The lower the interest rate, the lower your monthly payments will be.
How car financing through a dealer works
When you get your car loan through the dealer, it may look identical to the process of getting your loan from a bank or a credit union. But it’s not.
Dealers work with their own lending sources that “discount” their lending rates and pay the dealer a commission or bonus for selling that lender’s financing. What does this mean? That car loan that the dealer is charging you 6% APR for may only be costing the dealer 4%! This means that the dealer gets to pocket that extra 2% interest on every single payment, at your expense! And no, the dealer is not required to disclose this to you. You could end up paying thousands of dollars in unnecessary interest costs – that’s money you could be spending on other things!
What’s good and bad about financing through a dealer
There are some good reasons and some bad reasons to finance through a car dealer. Let’s run through the list:
- It’s easy –one stop does it all!
- Dealers have many lenders to choose from to get you your loan
- You can take advantage of the manufacturer’s special financing deals (if you qualify)
- The car purchase and financing are bundled into one transaction, making it difficult to separate the two to see if you are getting the best deal on both
- The dealer is marking up the rate on your loan, which will increase your monthly payment significantly
- The dealer may push you into an excessively long loan term, just so they can hit the monthly payment you are comfortable with
- Dealers will attempt to sell you all sorts of expensive and unnecessary services when they set up your financing, which will increase your monthly payments even more:
- GAP insurance (you can get it elsewhere for less)
- Credit insurance (you can also get it elsewhere for less, if you really need it)
- Paint protection (not needed)
- Key protection (unnecessary)
- Extended warranty (you can get it elsewhere for much less, if you plan to keep the car long enough to use it)
- And many more – just say no!
How to avoid dealer financing hassles and get a better deal on your next car
There’s an easy way to avoid the many problems that can result from financing your next car at the dealer – get your own financing! Simply apply for your car loan directly from a reputable bank or credit union. Here’s how:
- Figure out how much your next car will cost and approximately how much you will need to borrow.
- Find out what your credit score is, so you can know what type of loan rates you can expect.
- Check out auto loan interest rates on Bankrate.com and similar sites to see who has the lowest rates.
- Apply for a loan and get pre-approved by your choice of low-rate lender.
- Take your pre-approval to the dealer when you shop for your car.
- Do not discuss financing with the dealer – just focus on negotiating the price of the car you want.
- When you have the best price on your car, ask the dealer if they can beat your pre-approved loan rate.
- If they can’t beat your rate, use your pre-approval and get financed by your lender.
- If they can beat your rate, be sure that their offer is legitimate, with no other fees or charges added. Compare the total cost of the dealer’s loan to your loan – if it’s not lower, don’t finance at the dealer.
- If you don’t like how you are being treated, walk away and find a dealer you are comfortable with.
Now that you have found your next car, there’s just one more thing…
If you are buying a used car, you should know exactly what you are buying, and whether you should buy it or not. That’s where POMCAR comes in!
When making a commitment to buy your next vehicle, you should always make your purchase contingent on its passing POMCAR’s pre-purchase inspection. POMCAR will send a qualified technician to thoroughly check out your prospective purchase. Our technician will perform a comprehensive 270-point inspection which will cover:
- The car’s identity, details and mileage
- Tires and brakes
- Exterior and undercarriage
- Electrical and lights
- Road Test
- Fluid checks
- Diagnostic scan for error codes
Following our inspection, POMCAR will provide you with a detailed report of the car’s condition and safety-related systems, including photos of any noted problems. Once you review your POMCAR report you can buy with confidence – or avoid a problem vehicle, depending on the results!
To set up your POMCAR inspection, get started here. Have fun shopping for your next car and remember – POMCAR has your back!