A lot of car dealerships are advertising zero-percent financing, no money down, and unbelievably low interest rates. Such offers are enticing as they make you think, as a car shopper, that financing programs offered by car companies are the best deals you can get. But how do dealers really do car financing?
Indirect Financing and Dealer Markup
When a car shopper opts to finance a car in a dealership, the latter facilitates the loan process through a third-party lender. This is called indirect financing.
In indirect financing, the dealer acts as the middleman between you and the lender. And in the process, the dealer marks up the interest rate given by the lender to make more money from the service. This is called dealer markup. It isn’t illegal for dealers to mark up the interest rate, but some states do cap the increase.
The Impact of Dealer Markup
In any case, dealer markup significantly affects the overall cost of the car purchase. With it, the interest rate becomes less dependent on your creditworthiness. Even if you have an excellent credit, you could still get a higher interest rate than what you’re only supposed to get because of the markup. This can cost you several thousand dollars over the life of the loan.
Moreover, car dealers often add extra costs to the auto loan. These usually come in the form of unnecessary services, extended warranties, insurance, and the like. You don’t have to purchase these from them right away. Read the paperwork carefully and opt out of the products and services you don’t need at the moment.
How to Avoid Overpaying for Your Car
There are several ways on how you can avoid overspending for your car when you choose to finance with a dealership. One, research the available auto loan rates in your area. If you have a less-than-excellent credit, you will not be able to qualify for the best rates. But doing some research will certainly give you an idea of how much interest rate you could get.
And two, get a copy of your credit report and purchase your credit score. It is important to come well-prepared into a dealership. Know your credit situation well before letting dealerships take a look at it. If there is any inaccuracy in your credit report, have the reporting agency fix it and make the necessary adjustments. s