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by The Ascent Staff | Updated July 21, 2021 - First published on Dec. 6, 2019
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Car dealers don't always have your best interests at heart or on paper when it comes to financing your car.
Buying a car can be a daunting process. Consumers generally just want to get a reliable vehicle without paying any more than they have to. A car dealer's loan terms might seem attractive at first, but the terms you sometimes see on sleek TV ads are not necessarily the ones you'll get. Fancy commercials might get you in the door, but the fine print might make you ineligible for promotional offers.
If you have a little time to do some research, you may be better off showing up at the dealership with your own auto loan or personal loan. Here are a few reasons why going with the dealer may not be the best choice for you.
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There are a couple of ways a dealer can get financing for you. They can either loan you the money directly or work with other banks on your behalf to get an outside loan. Since the dealer is acting as a middle man, its compensation for securing the loan is often reflected in the amount of interest you pay. This commission is referred to as a "finance reserve" or "dealer reserve," and it can substantially increase your monthly payment.
If your credit score leaves something to be desired, dealer funding may be one of the few options available to you. This may result in higher interest rates, which reflect the lender's risk and the lack of competitive offers from other lenders.The increase in interest rate would depend on your credit score, and the higher interest rate might mean that you need a longer pay-off period to afford your monthly payments. Low credit scores don't always mean that the dealer financing is your only option, but it will likely mean that your lender will charge a higher rate to offset their risk.
If the dealer is negotiating with multiple lenders, then it will naturally find some loan packages more attractive than others. However, if the dealer only presents you with the loans that provide it with the highest compensation, you may not get the best deals for your wallet. You would clearly have been better off doing the research yourself.
When you're sitting at the salesperson's desk, you have no way of knowing whether you were approved for more loans than are being presented to you. The dealer may be looking for loans on your behalf, but it's still looking to make a profit. Even if you decide to go with dealership financing, applying for car loans in advance will give you an idea of what you're eligible for.
If the dealer's loan package is nowhere near the numbers you were previously quoted, that might be a sign that the dealer is steering your attention toward the loans that aren't best for you. Always question fees that you don't understand. If the lender can't explain their fee schedule to your satisfaction, take that is a red flag and move on.
While the dealer may be "helping" you to buy the car of your dreams, the two of you have competing interests. You want to pay less. The dealer wants you to pay more, and sales reps may pressure you to make a decision on the spot.
When you're doing your own loan research, you can play around with the figures that competing lenders offer and find the loan with the terms and monthly payment that work best for your budget.
With someone else at the wheel, you may end up with an affordable monthly payment but a long repayment term, which will translate to higher interest charges in the long run. It's important that you take the time to identify your financial priorities in the loan process -- without being rushed to make a decision.
In fact, if you were to change your mind about buying a car entirely when searching for a loan on your own, you could abandon your search with relatively little fanfare. At a dealership, however, aborting the car-buying process can be an uncomfortable experience. Some salespeople will do everything they can to keep you in the showroom or at their desk, no matter how desperately you want to leave.
When borrowing to buy a car, remember that you're making two purchases, not one. You pay for the vehicle and the loan, and you want to get the best price on both.
When you roll both of these products into one at the dealership, it's easier to miss important details. If you start by shopping for an auto loan ahead of time, you have one less thing to negotiate when you get to the car lot. When you arrive with financing in hand, both you and the dealer can focus on the car, which is the real product that you came for.
Consumers who open several types of accounts with their bank are often rewarded with perks. Doing more business with your bank could mean eliminating checking account fees or gaining access to additional rewards programs. If you bank with a credit union, their interest rates might be even lower than what you would get at a traditional bank. While it's unlikely that you'd take out a loan explicitly for the perks, it doesn't hurt to take advantage of the benefits that come along with your loan choice.
While there are good reasons to avoid dealer financing, you may still decide it's right for you because of credit score limitations or a specific promotion. But before you sign on the dotted line, take a few minutes to consider whether getting your loan through the dealer is the best option for you. The choice you make is likely to impact your wallet for the next few years.
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