A car dealer has a key advantage over most car buyers. But you can level the playing field. We’ll show you how easy it is to neutralize the edge a dealer holds over you.
Most buyers don’t know that getting the price they want can still leave them screwed on the deal. That’s because most car buyers let the dealer arrange their financing. Not all car buyers know that interest rates are negotiable. It isn’t hard to get a better rate and save a lot of money.
You will probably pay too much money for a car unless you understand how car dealer financing works.
You don’t have to be a genius to understand car dealer financing. But if you don’t understand dealer financing, you can wind up getting a great deal on the price of a car and yet leave thousands of dollars on the table in extra dealer profits. That represents money that could have stayed in your own pocket.
Smart car buyers always pay attention to both the cash price of a car, (which everyone knows) AND the financing terms, (which many people don’t know, because they have never been educated about basic finance).
Buyers who don’t understand car dealer financing are doomed to pay extra money for a car.
A car dealer stands to make more money by financing your car than they stand to make from selling you the car.
They do that by arranging your financing. Armed with your credit information, the car dealer consults a book of loan interest commitment letters supplied by various lenders. The commitment letters are offers from lenders. The lenders want to buy financing contracts from car dealers.
The commitment letters tell the dealer how much interest that lender will charge on various car loans. The rates are mostly based on a buyer’s credit score. Suppose you let the dealer arrange the contract to finance your car. The then dealer turns around and sells that contract to a lender. Lenders will buy your contract from the dealer. They pay a bonus for it over and above the cash price of your car. The amount of that “bonus” depends on how much money the lender can make from the interest rate on your car loan.
Why the car dealer tries to sell you on a higher interest rate.
It stands to reason that a dealer wants to finance you for a higher interest rate than the lowest rate offered in a lender’s commitment letter. The higher your interest rate is, the more money a lender will pay a dealer to buy your contract. A car dealer stands to make several thousand dollars extra by selling your contract to a lender if you agreed to pay a higher interest rate than what you could have had.
Before you go car shopping, go interest rate shopping.
Shop for interest rates by checking with banks and credit unions before you go car shopping. If you have interest rate knowledge before you go car shopping, it’s going to pay off when you are closing a deal.
An example of how car dealer financing works.
Let’s walk through a sample car financing deal. A lender’s commitment letter might tell the dealer that the lender is willing to finance you at 3.9% APR, (annual percentage rate). However, the dealer won’t tell you that. That’s because the dealer wants you to finance the car at a higher interest rate than what the lender is offering.
Instead of offering you the lowest rate, (we used 3.9% in our example), the dealer may tell you that “great” financing is available for you at 5%. If you balk at that, the dealer will pretend to “fight for you” and come back with maybe 4.5%, or even a bit lower. The dealer wants you to think that you are getting a square deal. Meanwhile, the dealer wants to keep your interest above the lowest rate that a lender is offering.
In our example, any contract with an interest rate above the established 3.9% floor rate will make a tidy extra profit for the dealer. It stands to reason that a bank will pay more money to buy your 4.9% loan than they will pay for your 4% loan. That difference comes right out of your pocket in the form of a higher monthly payment.
Your monthly car payment may wind up being higher than what you could have had unless you negotiated your interest rate from a position of strength.
The key take-away about car dealer financing.
The lesson is, don’t be shy about pushing for a better interest rate. If the car dealer balks, let the dealer know that you won’t sign the contract unless you get a better rate. If you have done your homework shopping for interest rates, you can haggle over the interest rate from a position of strength. If the car dealer won’t offer you a rate that beats what you can get elsewhere, then use your own financing instead of the dealer’s.
Don’t feel intimidated if you have less than perfect credit
This is especially true if you have some dings on your credit. A dealer may say the interest rate offered to you is the best you can expect, given what your credit looks like. If so, don’t believe it.
Even if your credit is not the best, interest rates are still negotiable. When a dealer says, “This is the best you can get because of your credit,” it’s nothing more than an intimidation tactic. Hold your ground, and tell the dealer it just is not good enough to make you sign a contract. A dealer almost always holds back the best interest rate. So, hold your ground and demand better terms.
How to squeeze the dealer for just a little bit more.
Let’s suppose you find out that your credit union will finance you at 2.9 %. Just keep that information to yourself. The dealer doesn’t know it, and offers you a loan at 4%.
Now it’s time for you to tell the dealer that your credit union will finance the car at 2.9%. The dealer may come back and offer to match the credit union’s rate. Should you agree to let the dealer have your loan by matching the credit union lower rate?
At this point, tell the dealer to beat your credit union’s rate, not just match it.
The dealer will probably come back with an interest rate that is slightly better than the best rate you can get on your own. When that happens, it’s the time to take the deal. You can enjoy your new car and rest assured that you didn’t leave any money on the table.
By Leon Bayer
