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The Truth about Auto Dealer Loans

Car Salesman Holding a KeyEver wonder how auto dealers can afford to advertise loans with APRs as low as 0 percent? You’re about to uncover the truth about auto loans arranged by dealers and other facts your dealer doesn’t want you to know.

The low APRs dealers advertise usually come with bigger down payments. And it usually means you are limited to the on-site stock the dealership wants to move, which means you may not get the car you want with the options you want. Alternatively, you could end up paying up to 20 percent more for options you don’t need. Finally, consider the pre-payment penalties that come along with it. These are the most important factors to look for when reading the fine print.

You’ll need to read that fine print carefully. Since the dealer wants to get rid of the car, you might think they’d give you a good financing deal in order to profit on the sale itself. While this may be the case, consider that the dealership’s finance manager’s sole purpose is to see to it that you walk out of that dealership with the HIGHEST monthly payment possible. This person will be presented to you as someone who will arrange a car loan for you at the lowest rate possible. They are not looking out for your well-being. Even if you're paying cash or arranging your own financing, you still have to sit down with the finance manager because he’s the one who does the paperwork and title papers associated with your purchase.

If you are paying cash or have arranged your own financing, the finance manager will still try to talk you out of it by telling you all the so-called advantages of letting him arrange the car loan for you. He’ll use computer programs and charts designed to convince you.

Why? Because the dealership and, consequently, the finance manager, who works on a commission, have a very lucrative department. It’s called financing. They profit in four ways:

  • The financing itself. The banks will pay a certain percentage of the amount financed to the dealership. The higher the interest rate the dealer can talk you into, the higher the commission.
  • Extended warranties. There are many different warranty companies and many different levels of coverage available. Most dealers mark up the price anywhere from $400 to $2,000.
  • Credit Insurance. Dealers earn about 50 percent of the insurance premium on your coverage.
  • The finance manager will try to sell you a variety of products. Everything from rustproofing and paint sealant to window etching and alarm systems. All these items will carry a huge markup.

Finance any of these items into your loan and your monthly payment goes up. It’s like the car dealer gets a double commission when you finance your car, warranty, and insurance coverage with them.

Is there a way around dealer loans? Sure. Arrange your financing before going to the dealer. Surveys show that credit unions offer the best auto loan rates of any financial institution, and, if you’re a UNITED SA member, you’re already way ahead of the game. Call or stop by for a loan application. Once you’ve been approved, you can shop with peace of mind. If you've already financed a vehicle purchase with a car dealership, still call us or stop by. Chances are, we can save you money on the loan as well as any additional products you've purchased through the dealer.

Please remember when buying a new or used car:

NEVER negotiate a car deal based on payment.

If the salesperson asks you what payment you’d like to have, tell him or her not to worry about the payment. You want to negotiate a price on the car. A payment that sounds too good could actually mean a longer loan term and higher interest rate.

When negotiating a car deal, don’t let the salesperson know that you have your own financing in place.

If you tell your salesperson up front that you have already arranged financing and he relays this information to the sales manager, they might make the decision to hold out for more profit on the car deal thinking that they’re not going to make anything on the loan.

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