How Dealer-Arranged Financing Works
In dealer-assisted financing, the dealer gathers your information and shares it with one or more potential car loan providers. If a lender decides to finance your loan, they may offer or quote an interest rate to the dealer, known as the "buy rate." The interest rate you negotiate with the dealer might be higher than the "buy rate" as it could include compensation for the dealer's financing services.
For example, a dealership submits your loan application to multiple lenders (banks, credit unions, etc.) they work with. A credit union responds with a 5% buy rate. The dealer then presents a 6% interest rate to you. The extra 1% is for the dealer's effort in arranging the loan.
Dealer Financing Negotiation
You might be able to negotiate the interest rate provided by the dealer. Request or negotiate a loan with better terms, and compare the dealership's financing offer with any pre-approval rates from banks, credit unions, or other lenders. Choose the option that suits your budget best.
Key Takeaways in Dealer Financing
Some dealerships offer "in-house" financing for borrowers with poor or no credit, such as "Buy Here Pay Here" dealerships that advertise messages like "No Credit, No Problem!" The interest rates on loans from these dealerships can be significantly higher than loans from traditional lenders. Consider if the loan's cost is worth the vehicle purchase. Even with poor or no credit, explore options with banks, credit unions, or other dealers willing to offer loans. These types of dealerships typically require you to make monthly payments directly to them instead of a bank or credit union. Some Buy Here Pay Here dealerships and other lenders catering to those with poor or no credit may install devices in the vehicles to facilitate repossession or disablement in case of missed payments.
Purchasing a car is a significant decision, particularly concerning your finances. Carefully assess the terms (payment, duration, and interest rate) of all offers. Acquiring an auto loan directly from a lender bypasses the dealer's involvement and potential markup in financing negotiations. A small difference in interest rate may not seem significant, but it can accumulate over the loan's duration. If you're unsure how a payment might fit your budget, consult a credit counselor. They can evaluate your income and expenses and might help you reduce debts to better afford a vehicle.