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Ever wonder how auto dealers can afford to offer (or at least advertise) loans with APRs as low as 0%? You're about to uncover the truth about auto loans arranged by dealers, and other facts your dealer doesn't want you to know.
The low APRs dealers advertise usually come with bigger down payments. And it usually means you are limited to the on-site stock the dealership needs to move, which means you may not get the car you want with the options you want. Alternatively, you could end up paying up to 20% more for options you don't need. Finally, consider the pre-payment penalties that come along with it. These are the most important factors to look for when reading the fine print.
And you'll need to read that fine print carefully. Since the dealer wants to get rid of the car, you might think they'd give you a good financing deal in order to profit on the sale itself. While this may be the case, consider that the auto dealership's finance manager's sole purpose is to see to it that you walk out of that dealership with the HIGHEST monthly payment possible. This person will be presented to you as someone who will arrange a car loan for you at the lowest rate possible...as if they are looking out for your well being. Even if you are paying cash, or arranging your own financing, you still have to sit down with the finance manager, because he or she also does the paper work and title papers associated with your purchase.
If you are paying cash, (or have arranged your own financing), the finance manager will still try to talk you out of it by telling you all the so-called advantages of letting them arrange the car loan for you. They'll use computer programs and charts designed to convince you.
Why? Because the dealership, and consequently the finance manager (who, by the way, works on a commission), has a very lucrative department. It's called financing. They profit in four ways:
1. The Financing Itself. The banks will pay a certain percentage of the amount financed to the dealership. The higher the interest rate the dealer can talk you into, the higher the kickback.
2. Extended warranties. There are many different warranty companies and many different levels of coverage available. Most dealers mark-up the price anywhere from $400 - $2,000.
3. Credit Insurance. Dealers earn about 50% of the insurance premium on your coverage.
4. The finance manager will try to sell you a variety of products. Everything from Rustproofing and Paint Sealant to Window Etching and Alarm Systems. All of these items will carry a huge markup.
Finance any of these items into your loan and your monthly payment goes up. It's like the car dealer gets a double commission when you finance your car, warranty, and insurance with them.
Is there a way around dealer loans? Sure. Arrange your financing before going to the dealer. Surveys show that credit unions often offer the best auto loan rates of any financial institution. As a First Source Member, you can simply call or stop by to apply. If you are not yet a First Source Member, there are over 250 ways to join!
When negotiating a car deal, however, don't let the salesperson know that you have your own financing in place until you’ve already negotiated the final price. He/She may be more reluctant to negotiate the price of the vehicle knowing they will not be profiting from the loan.
Ask about our Free Car Buyer’s Helpline where not only will we help you find the vehicle to fit your needs; we’ll even help negotiate the best deal on your behalf!
*Applications are subject to credit approval. Rates and terms are determined by overall credit history and are subject to change.
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