Some Auto Finance Basics
If you’re planning to purchase a new or used vehicle, or lease a new one, there are a few important things that you should keep in mind before you sign on the dotted line at the dealership.
To begin with, always remember this: Most automobile dealerships typically do not actually finance a car loan or lease, nevertheless, the dealership will most certainly have some sort of impact on how much you will wind up paying for your car financing.
One a side note, one good thing to keep in mind is that car dealerships will always be happy to sell you a vehicle for cash in hand. You can even demand, and often get, some pretty big discounts if you pay for your car when you buy it. This is because auto dealerships are franchises and do not actually work for the automobile manufacturer, and so, the auto dealerships have purchased their inventory using the help of business bank loans that, of course, have to be paid back with interest. Therefore, when an auto dealership has the opportunity to sell a car for cash, they usually jump on it.
On the other hand, if you don’t pay with cash in hand and choose to take out a car loan, the dealership will certainly get their money as well. In this case, the financial institution providing the auto loan will reimburse the dealership for the cost of the car. In addition, the car dealership stands to make a nice profit on your car loan by sharing in the interest rates, commissions, and other fees attached to the loan.
What’s in Your Car Loan for the Dealership?
When an automobile dealership sells a vehicle to a consumer,the finance department at the dealership will generally try to steer the consumer into a car loan from the bank or financial institution that the dealership has a relationship with. The obvious reason for this is that the dealership plans to get a “kickback” from the auto lender on your car loan, and, you guessed it, you will be paying extra for that. However, as a consumer you have the ability to get your auto loan from any car financing company, bank, or credit union that you like. The automobile dealership, in most cases, does not finance a loan in-house to a consumer at all. Dealerships will not process the car loans or even take payments on the loans themselves, all they will do is take the application papers that you fill out, and will arrange your auto financing with companies that they usually work with. So, you should certainly consider looking directly to your bank or credit union for financing first. It may save you some money.
The auto dealership will check your credit history, not for the purposes of making the auto loan, but to see if you will qualify for auto financing to begin with or if you have any serious bad credit issues that are currently outstanding. Even so, the dealership is not able to approve your application for a car loan and, in fact, does not make loans at all. The bank or other financial institution that the dealership forwards your completed application to will do their own set of credit history and past payment history checks.
When the financial institution is done checking out your credit worthiness you will be classified as one of three credit types. These are Prime, Near Prime, and Sub Prime. Prime means that you have a great credit profile and you have a higher credit score (FICO), usually above six hundred and eighty; as a result of this you will be offered the best possible interest rates on your loan. Near prime usually will fall around the six hundred and twenty to the six hundred eighty mark, and will usually mean that you could pay as much as four percent or so more than someone that has a prime score. If you happen to fall below that and are considered to be sub prime, it becomes a little more difficult to find a lending institution that is willing to give you an auto loan and when you do end up finding a good one the rate of interest you will be paying is going to be higher still. In some cases, sub prime borrowers may be required to make a down payment in order to be approved for financing.
You should also be aware that an automobile dealership has the ability to change the rate of interest that you would be paying on your auto finance. One of the hidden fee types that some shady automobile dealerships may try to include in your car loan is an automatic increase of the interest rate that the auto lender has offered for your auto finance. For instance, if the auto lender told the auto dealership you were approved for a car loan at 3.5% interest rate, the dealer would keep this information to himself and offer you an interest rate as high as 5.5%, making a major profit just on your loan. Of course, confronted with this fact, the dealer will say that this increase can be considered justifiable because it helps the dealership cover the cost of getting the consumer the financing they need. But, in all honesty it’s just additional profit or is used to make up for something they may have given to you somewhere else in the car deal. The most a car dealership is legally allowed to mark up your interest rate is by two and a half percent.
One thing that you may be wondering is whether or not you will be able to negotiate with the dealership for your own rate of interest. Usually, unless you have a stellar credit score, you will not be able to negotiate the base rate of interest that a lending institution gives to you, but you will be able to try and haggle down the markup that a car dealership tries to add on to your car loan. You should know that although some car dealerships practice this shady act not all of them take part in it. Remember, the better credit score that you have the better rate of interest you will receive over all from the financial institution and the dealership. So knowing what your credit profile looks like, and then shopping around on the Internet to research what interest rates are available to you is one of the best things you can do for yourself before even ever walking into a car dealership.
If you’re one of the millions of Americans that happens to have poor credit, and so experiences problems trying to get approved for a vehicle, maybe because of past credit issues or an undesirable debt to income ratio, there are still a couple of things that you can do in order to get yourself the car loan that you require. Often times, a cosigner will allow you to get auto finance without much of a problem. In fact, a cosigner with good credit will put you into a car loan just as if you had good credit. Of course, remember, if you fail to make you car loan payments, the finance company will seek repayment from the cosigner. Therefore, the cosigner needs to be aware of what is at risk. Other times an auto lender may ask for a large down payment to offset the high amount of risk that you have shown to them through your credit history. Putting down more of a down payment can also put you in the position to negotiate your interest rate down a bit.
So when it comes down to it, you should always know what your personal credit profile and score looks like before ever walking into an automobile dealership, just to make sure that you will not be startled when something goes wrong later on. The next thing you should do is to shop around for a good auto loan that is flexible for all situations online before going into a car dealership. There are many different places to do this online and getting multiple quotes from different companies will allow you to find the best possible deal regardless of your credit history and situation.