A dealer’s primary business is selling automobiles. However, skyrocketing car prices in the past few decades have led to a new money-making department in the typical car dealership. This department is known as the Finance and Insurance Department. Auto dealers that offer financing do not make or originate loans; instead, they act as loan brokers, bridging the gap between the consumer and the bank. The exceptions to this rule are car dealers that offer “in-house” financing, commonly referred to as “Buy-Here-Pay-Here.”
Ask Your Dealer to Shop Around
Car dealers usually work with multiple banks and finance companies; it’s not uncommon for a dealer to have six to a dozen lender contracts. Once your dealer has secured financing for you, you may want to ask the Finance and Insurance Manager if he checked with multiple banks to compare interest rates and financing terms. According to Experian, multiple credit inquiries around the same time, for the purpose of shopping interest rates, does not negatively affect your credit score.
How to Avoid Interest Rate Markup
For closing an auto loan and doing business with a bank or finance company, a dealer is financially rewarded. In many situations, the dealer is paid a flat fee for each approved and signed contract. This, however, has little to no effect on you. What does have an effect on you is the dealer’s interest rate markup. Depending on your state laws, the dealer can usually mark up the interest rate offered by the bank by several points. This is often called “adding points” or “dealer financing participation.” It’s understandable that the dealer would want to do this; it’s profit, the ultimate purpose of any business. However, your goal should be to minimize dealer participation as much as possible. Ask the dealer to show you the call sheet from the bank or finance company; this will provide you with the actual interest rate that the bank is giving you. If the dealer chooses to mark the rate up a quarter or half-point, you shouldn’t have much to worry about. But if the dealer tries to mark it up several points, you may end up paying thousands of dollars extra, especially on a larger auto loan.
Read the Fine print
Used car financing opens the door for other profitable-for-the-dealer but costly-to-you arrangements. Additions such as “VIN Etching,” “Paint Sealant,” and “Rust-Proofing” can be easily added to the bottom of a finance contract. In most cases, the prices for said additions are bloated and nowhere near equal to the benefit. However, some additions such as GAP Insurance, which can help pay off your auto loan if your vehicle is totaled, are very helpful, and usually recommended by experts. The most important car loan advice is to read the fine print to make sure you know exactly what you’re paying for.