Let the Past Die, Kill It If You Have To
When shopping for a car, many consumers overlook financing until after they have made a purchase decision. Too often, they apply for financing through the dealership that has the car they want and accept the terms offered without question. However, just as the internet and transparency have empowered consumers to negotiate better car prices, financing options have also evolved, providing opportunities to save money. If you're in the market for a vehicle and considering an auto loan, here are compelling reasons why you should avoid financing through the dealership.
Dealer Financing Limits Your Options
When a dealership runs your credit they have a list of lenders and institutions that they work with. The problem is, that you may qualify for a lower rate from a different lender not accessible to the dealer. This is why considering financing beforehand is important, You do not want to be locked into a range of rates by limiting yourself to the list of lenders that a particular dealership happens to utilize.
By exploring other financing options, such as credit unions, banks, or online lenders, you can ensure that you are getting the best possible interest rate and terms for your auto loan. Credit unions often offer lower rates and more personalized service compared to traditional banks. Online lenders can provide competitive rates and the convenience of applying from home.
Dealer Mark-Up & Fees
With the advent of online shopping and the wealth of information available to consumers, the markup on the actual vehicles dealerships sells has shrunk continuously. Thus in order for car dealerships to make money they have to get creative. Dealerships do NOT make money from selling cars, it is warranties, service contracts, and financing. There's no shortage of upsells and add-ons in the car purchase process. After hours of shopping and waiting consumers often lose big in financing by accepting unnecessary additions.
However, there is a much sneakier way dealerships take your money, by marking up the actual interest rate itself. In other words, the salesman offers you a higher interest rate than what you are approved for and the dealer pockets the difference. While this practice, sometimes called "dealer reserve" is not always a factor, and is almost always limited to around 2%, this can add up over the life of a loan. For example, if you are approved for $30,000 at 10%, a marked-up rate of 12% could cost you around $1800 by the end of a 60-month loan. See our auto loan calculator to estimate interest savings.
Pre-Approval Puts You In Control
Getting pre-approved for a loan before visiting the dealership gives you a clear understanding of your budget and strengthens your negotiating position. With pre-approval in hand, you know exactly how much you can afford to spend, which helps you avoid the temptation of stretching your budget for a more expensive vehicle. This financial clarity allows you to focus on negotiating the best price for the car rather than getting bogged down in discussions about financing terms.
When the dealership knows you are pre-approved, they are more likely to take your offer seriously and may be more willing to negotiate on the car's price. This can lead to a better overall deal, as you are not reliant on the dealership's financing options and can walk away if the terms are not favorable. Additionally, having pre-approval can expedite the buying process, making it quicker and smoother, as much of the paperwork and approval process has already been completed.
In essence, pre-approval empowers you as a buyer, giving you control over the financial aspects of your car purchase and ensuring that you get the best possible deal.
Best Ways to Find Financing
Now that we've discovered the ways in which the dealership car financing process leaves money on the table, let's examine your options for getting the best rate and terms before you shop.
Check with Your Bank
Checking with your current bank or financial institution is a great starting point when looking for financing. Since your bank already has your financial history, the loan application process can be smoother and faster. Banks often offer competitive interest rates to their existing customers as a loyalty benefit. Additionally, managing your loan alongside your other banking services can be more convenient and easier to track.
Compare Offers Online
Using online comparison tools to evaluate different loan offers from various lenders can provide you with a wide range of options. These tools allow you to compare interest rates, loan terms, and other conditions to find the best deal for your situation. Websites like LendingTree, Bankrate, and NerdWallet are popular choices for this purpose. These tools are user-friendly and can save you time by aggregating information in one place.
Join a Credit Union
Credit unions are member-owned and not-for-profit, which often allows them to offer lower interest rates compared to traditional banks. They may offer more flexible loan terms and be more willing to work with you if you have less-than-perfect credit. As a member, you may have access to other financial products and services that can benefit you in the long run. Joining a credit union can be a smart move for those looking for personalized service and better loan conditions.
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