Most people don’t realize that car dealers do not directly provide an auto loan. They simply forward your application to lenders who provide the final financing.
A majority of car buyers do not take the time to check other auto financing options before heading into a dealership. That is not wise. This is much worse than wasting your time watching The Last Jedi or 22 Jumpstreet! As a result, the dealers are often able to make their sale without being cross-questioned on the financing rates.
Here are five good reasons why you should not finance a car from a dealer.
1. Inflating Car Prices through ‘Packed Payments’
Packed payments work in the favor of dealers because most customers do not focus on the overall value of the vehicle, and instead look only at the monthly payments they need to make while arriving at a buying decision.
Dealers inflate car price by packing products and services you did not ask for in the loan payment. They can add GAP insurance, tire insurance and extended warranties that might seem like paltry monthly additions. However, a monthly increase of $25 over a 60 month period will cost you $1,500 extra. Can you figure that out Napoleon Dynamite?!
You should always arrange your own financing before going to a dealer to avoid this scam. If not, make sure you look at everything packed in the final car value and loan amount.
2. Risk of Getting into a Spot Delivery Trap
Spot delivery scams are not carried out by all dealers. However, they are on the rise. A dealer will arrange for financing and let you take the car home. He calls you up a few days later to inform you the financing fell through and you would have to return the car.
When you reach the dealership, the dealer pressurizes you into signing a loan with higher interest rate, larger down payment or both.
You end up paying more than you expected with the dealer making a nice, fat profit. Most dealers are offered gifts or incentives by financial companies to drive business their way.
A dealer will not think twice before getting you to sign the dotted line on a bad loan if his free vacation is on the line. It is best to arrange for your own finances and never rely on the dealer. The dealership is not after your best interests.
3. Faking the Credit Score
Dealers take advantage of the fact that many potential buyers do not know their credit scores. You can be ripped off very easily if you walk into a dealership without knowing your own credit score. You cannot rely on dealership financing blindly.
A dealer can easily lie through his teeth about your credit score. They just have to tell you a lower score after performing your credit check. You are in for a big rip-off if you believe them when they tell you that you don’t qualify for competitive financing rates.
Car buyers often become desperate when they feel the car of their dreams is slipping out of their reach. Dealers take advantage of this desperation that car shoppers experience when they think they will not get financing.
You are more likely to take up a higher interest offer when you are not thinking straight. Many car buyers do this without realizing that they made a fat profit for their dealer.
It is best to check your credit score before entering a dealership. Likewise, you can also apply for a pre-approval that will confirm the financing you are eligible for.
4. Increased Buy Rate
A dealer shops your loan application to various lenders to get different quotations. This is called the ‘buy rate’. However, dealer financing is not obligated to provide the same interest rate as the lender quotes to the dealer.
A dealer is allowed to legally pile on their administrative charges and other fee to this rate. A high buy rate means thousands of dollars in unnecessary interest payments that you pay extra on top of the loan amount.
This profit is called dealer reserve of finance reserve. Most dealerships split a small portion of the profits with the finance company as well. The usual markup is 4%. However, some states have set a limit of 2.5%. Too bad California does not have a set limit on bankrupt cities – apparently they don’t care about those standards!
You might feel 2.5% is not a huge amount. However, you can easily pay thousands extra over the life of your term with a small inflation in monthly payments.
You need to shop for all other eligible offers or at least visit a dealership prepared with your homework. A dealer should match the great offers you get outside the dealership and not offer you a loan that has the highest profit potential for him.
5. No Loan Obligations
A dealership is under no obligation to provide you the lowest rate or show a list of lenders offering you a loan. Dealers take advantage of this fact and present an offer that best suits them and not you. Dealers have to pay acquisition fee to the lender. They also take into account their finance markup while presenting a loan offer.
They will present an offer with the lowest acquisition fee and highest markup even if it means a higher interest rate for you.
Dealers want to make as much money as they can. A dealer on average earns only $700-$800 on the sale of a new car. However, a dealership has the capacity to make as much as $3,000 by offering you a loan that is profitable to them.
Loan packaging is another profit center for dealers, though it is not very common. This occurs when they package two or more loans together in a bundle to get lender approval for someone with bad credit. The person with prime credit score essentially subsidizes the payment of the bad credit loan by paying higher interest rate.
This might suit the person with a bad credit. However, you lose out on a lot of money when you are the person with a good credit score.
The Bottom Line
You can save thousands by not seeking dealership financing for your new car. There are many online lenders who provide loans to people with bad credit score or no credit score. It is best to find a reputable and established traditional or online car loan provider than depending upon dealers.
Just don’t deal with someone named Marlo from The Wire or Walter White from Breaking Bad!