Americans will buy an average of more than nine new cars over the course of their lifetime, according to automotive research firm Polk. And that figure is down from 13 in those carefree pre-recession days. Surprisingly enough, for all those new cars we buy, many of us remain confused about the best way to go about paying for those cars. Should we get a loan through the dealer? Or should we go direct through a bank, credit union, or specialty finance company?
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Broadly speaking, you should avoid buying your car with a loan arranged through the dealer. In fact, dealer financing generally only makes sense in a very specific scenario: a) you have excellent credit b) you’re buying a new vehicle c) you’re taking advantage of special offers d) you resist the dealers’ tendency to try to sell you “extras” and “add-ons” that you don’t need.
Now, that’s a very narrow scenario. But that is because, if you have great credit and you know exactly what you want, you can tilt the balance of leverage that car dealers typically enjoy over the consumer. The only other scenario in which it may be to your advantage to purchase your vehicle via a loan through the dealer is if you have weak credit and cannot otherwise qualify for financing.
Dealing with shady car dealers and car loans
If that’s the case, however, then you already find yourself at a strong disadvantage in this process, and the question that drives this post becomes, “Should you get a car loan through a dealer?” rather than “What happens if you can’t get a car loan from anyone but the dealer?”
The main reason it doesn’t pay to get a dealer loan is that not only are interest rates higher but they contain hidden finance charges or “mark-ups” that dealers tack onto your actual loan, often without advising you that they’re doing so. According to The Center for Responsible Lending, rate mark-ups cost Americans $25.8 billion over the life of their auto loans.
Not surprisingly, these mark-ups affect buyers with the least amount of leverage the most: buyers with weak credit purchasing used cars. But risky buyers aren’t the only ones who get stung by mark-ups. Mark-ups are a feature of nearly every loan by dealers, and in many cases they constitute a stronger source of income to dealers than the actual sale price of the vehicles themselves!
Although dealers who slip mark-ups into their financing deals are increasingly coming under scrutiny by consumer protection advocates, the practice is still widespread enough to put off the prudent, empowered buyer who does not absolutely have to work through a dealer for financing.
What other choices do you have?
Alternatives to seeking dealer financing include what are called “direct purchases” or “direct loans,” which you can obtain through banks, credit unions, or specialty financing companies. If you have strong credit, banks and credit unions offer the best financing terms for an auto loan, and especially if you’ve already developed a good relationship with them. Not only that, but their financing terms will be completely transparent, whereas dealer loans often involves shady “back-end” where the above along with referral fees are passed along to the buyer.
Plus, when you’re auto loan shopping at your own bank and others, there’s no pressure. You can compare interest rates and loan terms at your leisure. Whereas, once you’re in the chair at the dealership, it can be very hard to feel comfortable asking lots of questions.
If you do find yourself unable to get an auto loan from a bank or credit union, and you must go through a dealer, prepare yourself. Seek pre-approval and/or research financing packages online through banks and other auto loan companies to learn what the best possible interest rates you might get look like.
Check rates at traditional banks and online-only car lenders such as Capital One and E-Loans. This way, at least you’ll have a point of reference when you get to the dealership. Once you’ve found a vehicle you like and you’re in the dealer hot seat, negotiate.
Everything, from the interest rate to the sale price, are 100% negotiable, and you should always give yourself permission to walk away at any time if the terms aren’t favorable enough. Finally, consider your timing. You’re far more likely to strike a good deal on the lot if you go shopping on weekdays and toward the end of the month when the salespeople are eager to get their final numbers up.