Navigating auto loan financing can be quite a headache. But, unless you want to walk everywhere, it’s something that has to be dealt with. One of the biggest hurdles is figuring out the right approach and understanding who will be profiting from the transaction.
To help you feel more prepared about the challenging parts of automotive financing, we’ve rounded up some of the questions the dealership hopes you won’t ask.
How do dealerships secure financing?
Car dealers usually have a department that is responsible for setting up financing and insurance (commonly referred to as “F&I”). These people take the car’s estimated price, actual value, and your credit history to several different credit providers. These include major national lenders, auto manufacturer financial departments, and some local lending institutions (like FFCCU) depending on the dealership. These vendors each quote an interest rate and other fees to finance the vehicle.
Dealerships usually have longstanding business relationships with their lenders, which often include incentives for the dealer as a “reward” for financing a loan through that lender. Because the lenders are competing for the dealer’s business, not necessarily for yours, those incentives are for dealers and not consumers. While the dealer knows that lower interest rates make you more likely to buy a car, in this stage of the deal, you are not the customer, you’re the product. The dealer is trying to sell your business to a lending organization and profit from the transaction
When should I tell the dealership I already have financing?
Let’s be clear: your decision to finance through the dealership can be profitable for them in many ways. So, if they know they can’t turn a profit from financing, they’re more likely to push harder to find profit elsewhere. You’re almost always better off keeping the auto loan for the last part of your transaction with the dealership, particularly if you’ve already secured financing.
To have a leg up, don’t wait until the last minute to secure your auto loan financing. Discuss your plans with an FFCCU teammate, including the type of vehicle you are planning to purchase. By doing your research ahead of time and knowing what financing options are available to you, you can strengthen your negotiating position on other parts of the transaction, like the price of the car or the value of the trade-in.
How do dealerships make money offering 0% financing?
If you’re shopping for a car because you’ve seen an advertisement for 0% financing, you’re not alone. The volume part of the money-making strategy is simple: an offer for 0% financing gets people on the lot and in the door and encourages them to think about buying a specific car brand. The manufacturer and the dealer both make money on each car sold, so the 0% financing trades some profit per car, but the dealer may be able to recoup some of that profit through the number of vehicles sold.
Selectivity is the other piece of the puzzle. Not everyone who comes to a 0% financing event will qualify for that rate. Because most people who get to the point of discussing financing have decided to purchase a car, they’ll settle for a non-zero rate when it’s presented to them. Between these two strategies, advertising 0% financing does pretty well for a car dealer.
Does my salesperson benefit from financing my car purchase?
This really depends on the dealership. Most of the time, your salesperson earns their commission from the car’s purchase price, the warranty, and some high-markup items, like undercarriage treatment or upgraded tires.
In these instances, it’s also very likely that your salesperson has little to no control over your financing. He or she might be able to go back to the financing department and ask them to attempt to negotiate a better rate, but this negotiation may not have much success. In any case, someone at the dealership profits from getting you a loan through them.
What is GAP insurance, and is it right for me?
“GAP” or guaranteed asset protection insurance is automobile insurance covering the difference between the total amount of the loan and the value of the car. It protects against the worst-case scenario that you total a car, or the vehicle is stolen, but you still owe more than it is worth. While your comprehensive insurance coverage will reimburse you for a total loss, you’ll only receive the value of the car, leaving you on the hook for the remaining interest and finance charges.
GAP insurance is designed for long-term, high-interest, or low down-payment financing. If you are buying a car without putting a lot of money down, or if your credit history is not stellar, you should consider getting GAP insurance. A dealer may even require you to purchase GAP insurance as a condition of financing your purchase in these circumstances. The cost of the insurance is almost always paid upfront, as part of the financing charges.
But, like any other purchase, you’ll want to shop around. Because so many financing arrangements require you to purchase GAP insurance, dealerships maintain deals with insurance agencies, expecting you to purchase it without much thought. It’s one last effort to make money off your purchase, and they rely on you to not notice. You may be able to find better rates on GAP insurance from a broker or your primary banking institution.
What steps can I take to avoid being railroaded by last-minute financing changes?
Automobile financing is among the easiest places for dealers to make money because it’s almost always the last stop in the car-buying process, and they expect you to be both committed to purchasing a car and exhausted from making a series of decisions. High-pressure salespeople use this to their advantage. When it comes time to talk financing, frequently, the license plates are off your old car, and you’re sitting down with a sales manager.
While it may seem counter-intuitive, this is the best time to walk away and get a second opinion on financing. If you have not already sought pre-approval from them, see if your credit union can offer you a better rate, lower fees, or a more flexible term. Ask them to commit as much as possible to a price on an offer sheet. Then, tell them you’d like to take some time to think about it. If you return with a cashier’s check in hand, the sales manager may hem and haw a bit. But, at the end of the day, they’d rather make the sale than make a little extra on financing.
This is a crucial step if your history with credit is complicated. A giant lending corporation won’t see the steps you’ve taken to solidify your financial position. They don’t have the same relationship with you that your credit union does. They see you as a risk number and an interest rate they can justify, not as a member of a community institution. Always give your credit union the first chance to beat the dealer’s offer – after all, your credit union works for you, not for a commission.
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