How Dealer Financing Really Works

When you understand how dealer financing really works, you will be able to determine if you want to use the automobile dealer’s lending source for your new vehicle purchase. It is a common misconception that a car dealer would rather that you pay cash when you buy a car from them. In reality, the dealer actually wants you to use their lender for your financing, so they can make money on the finance charges you pay. If you do a little research, and find the best interest rate available from your local lenders, you will be able to ensure that the dealer does not take advantage of you during the financing process.

Dealer Pre-Approvals 

When you have agreed to buy a car from a dealer, your salesperson will ask you how you intend to pay for it. If you decide to finance your purchase, the salesperson will take you to the office of the dealership’s finance manager.

The finance manager will take your loan application and review it to determine if you qualify for a loan. He will check your credit history and verify that the information on your application is correct. If everything is in order, the finance manager will give you a pre-approval for a loan. This is not your final loan approval. The finance manager will have to secure financing for you from one of the lenders associated with the dealership in order to finalize your purchase. 

Dealer Lenders

If you want to finance your vehicle purchase through a car dealer, it is a common misconception that they are the permanent lender. A car dealer is not a bank that lends money to customers for the purpose of financing a vehicle. They are an independently owned operation that sells and services automobiles.

How the dealer accommodates your loan request is by having their finance manager send your application to the different lenders they use for financing. The sources will usually be several local banks or the finance company of their vehicles’ manufacturer.

If the finance manager receives an approval on your loan application from multiple lenders, you will be able to choose which one you want to use for your loan. If you do not like the approval terms, you can either negotiate a more favorable rate or use your own lender to pay for the vehicle.

Dealer Markup 

When the car dealer’s finance manager gets an approval on your car loan, there will be an interest rate range that the lender allows him to use. The dealer may try to mark up your interest rate, from the lowest possible rate to the highest. If he is able to get you to agree to the markup rate, the car dealership will keep all or part of the additional amount that you pay in finance charges.

By shopping around with your local banks to see what the best interest rate is, you can negotiate with the finance manager to lower your rate. This will ensure that there is no markup involved, which will save you money on the finance charges.