Looking to Save Money on an Auto Loan? This One Trick Can Save You Some Serious Cash

Doing this can save you thousands of dollars when buying a car.

Are you in the market for a new or used car? If so, you may be wondering how you can save the most money. You have done your research on the car you want, completed a test drive, and compared prices so you can negotiate the best deal. While all of these are important steps to take, many buyers overlook this one trick that can help you save some serious cash.

You should always walk into a dealership with outside financing for your auto loan instead of going through the dealership. Here's why.

How car dealerships really make money

Not many people realize that dealers don't make the majority of their profit from selling cars. In fact, according to research, dealers on average make only about $65 per used car and actually lose about $200 per new car sold! So how do dealers make money? Their primary sources of profit are dealer financing, selling extended warranties, gap insurance, additional car add-ons, and other services.

What is dealer financing?

Most people don't have the cash to buy a new or used car outright, so they have to borrow money. Car dealerships will offer you a loan to help simplify the car-buying process. You just need to pick out the car you want, pay the down payment, complete the paperwork, and the car is yours!

Many people don't realize, however, that dealerships typically markup the interest rate on loans that they arrange. This means you'll end up paying more in interest over the life of the loan if you go through the dealership. Additionally, if you have bad credit, the interest rate the dealership offers you is likely to be quite high.

A dealer may get 3.5% for a $40,000 car you want to purchase. Over five years, this equates to $3,660 in interest. The dealership may then markup the rate to 5%, which equates to about $5,290. The dealer keeps the difference of $1,630 as its profit. This is money you could possibly keep for yourself by finding outside financing.

How to pursue outside financing

If you decide to pursue outside financing, also known as direct lending, for your auto loan, there are a few things you'll need to do. First, you'll need to find a lender. You can use your bank, a credit union, or search online for the best rates. The key is to compare offers from multiple lenders at once and choose the one that's best for you.

Once you've found a lender, you'll need to fill out an application and provide documentation, such as proof of income and the car you want to buy. Once your application has been approved, the lender will either send you or the dealer the money, which you can then use to pay for your car. Your rate will depend on your credit score and other factors. You will typically save more since there is no markup.

If you're looking to save money on an auto loan, pursuing outside financing is a great option. By doing so, you can avoid the dealer markup and potentially get a lower interest rate -- even if you have bad credit. To pursue outside financing, simply find a lender and fill out an application. You may have to spend more time to find the best financial institution for you compared to getting a loan from the dealer, but this could potentially save you thousands of dollars.