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How Not to Pay Auto Dealers Over $25B in Interest

Not all car buyers know how much they really pay for their car. Center for Responsible Lending (CRL) reported that car buyers paid as much as $25.8 billion additional interest in 2009 due to dealers’ markup. The average interest rate markup for every consumer was $714.

“Dealers argue that the rate markups are legitimate compensation for a valuable service the F&I office provides,” CRL notes.

However, there is not enough explanation why dealers have to charge for this service and how they come up with the interest rates they charge consumers. The apparent lack of disclosure leaves car buyers clueless about how much they are really paying the dealership.

Determining the Interest Rate

According to, there are four factors that affect the interest rate that will be charged a consumer.

The first one is the lender that the car dealership is doing business with. Car loan rates normally vary in banks, credit unions, and other financing institutions.

The type of car and the year model also affects the interest rate. In general, financing for new cars have lower rates than financing for used cars.

The third factor is the length of the loan. Short loan terms have lower interest rates than longer terms.

Lastly, the credit score, which has perhaps the greatest impact on the interest rate, is an important determinant. Low scores indicate a bad credit which normally gets a high interest rate. Car buyers with good credit can enjoy lower rates.

Getting a Low Interest Rate

Car buyers do not have to pay too much for their car just because of the dealer’s marked up interest rate. Here are some ways they can find the lowest interest rate available to them.

1. Securing financing first

According to the Kelley Blue Book, shopping around, comparing rates from multiple lenders, and arranging financing before stepping into a dealership somehow make consumers cash buyers.

2. Negotiating for a lower rate

Many car buyers forget that they can always bargain for a better interest rate at the dealership. Buyers should never agree with the dealer’s first offer. The first offer is often, if not always, hiked up.

3. Doing away with a long loan term

The Wall Street Journal recently reported that long loan terms are trending in today’s auto lending industry. Although many car buyers are going with the flow, a long loan term is really not the best way to go to get the lowest interest rate.

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