Six Questions your dealer hopes you can’t answer
Navigating automobile financing can be one of the biggest financial headaches you’ll encounter. But, unless you want to walk everywhere, it’s something you’ll have to deal with. The biggest hurdle is figuring out the angles and understanding the people that stand to profit from the transaction. Let’s go through some of the more challenging parts of automotive financing by addressing the six questions your dealer hopes you can’t answer.
1. How do dealerships secure financing?
Car dealers usually have a department that is responsible for setting up financing and insurance (commonly referred to as “F&I”). These people take the estimated price of the car, the actual value of the car, and your credit history to several different credit providers. These include major national lenders, auto manufacturer financial departments, and some local lending institutions depending on the dealership. These vendors each quote an interest rate and other fees.
Car dealers usually have longstanding business relationships with their lenders. These relationships, often include incentives for the dealer as a “reward” for financing a loan through them. Because the lenders are competing for the dealer’s business, not necessarily for yours, those incentives are for the dealers and not consumers. While the dealer knows that lower interest rates make you more likely to buy a car, you’re not their main focus in the sale. You are the product. The dealer is trying to sell your business to a lending organization and they usually profit from the transaction. This is just one of the six questions your auto dealer hopes you can’t answer.
2. When should I tell the dealership I already have financing?
Let’s be clear: Financing is profitable for dealerships in many ways. If they know they can’t turn a profit from financing, they’re more likely to push harder to find profit elsewhere. You’re almost always better off keeping the auto loan for the last part of your transaction with the dealership, particularly if you plan on securing outside financing.
This delay doesn’t mean, though, that you don’t want to think about financing until that point in time. Discuss your plans with your credit union, including the type of vehicle you are planning to purchase. Figure out what kind of rates they can offer. By doing your research ahead of time and knowing what financing options are available to you, you can let the dealer think there’s still money to be made in the financing. This possibility may strengthen your negotiating position, like the price of the car or the value of the trade-in.
3. How do dealerships make money offering 0% financing?
If you’re shopping for a car because you’ve seen an advertisement for 0% financing, you’re not alone. Like Toyota’s “Toyotathon,” campaigns offer manufacturers deals like 0% financing for 60 months and are incredibly popular for car buyers and dealers alike. If it were honestly a losing proposition for the manufacturer, they wouldn’t keep doing it. This reoccurrence might invite you to ask how they could make money on the financing. The answer is two-fold: volume and selectivity.
The volume part of the money-making strategy is simple. 0% financing gets people on the lot and encourages them to think about buying a specific car brand. The manufacturer and the dealer both make money on each car sold, so the 0% financing trades some profit per car, hoping that they’ll make up for it in the number of cars sold.
Selectivity is the other side of the volume. Not everyone who comes to a 0% financing event will qualify for that rate. Because most people who get to the point of discussing financing have decided to purchase a car, they’ll settle for a non-zero rate when it’s presented to them. Between these two strategies, advertising 0% financing does pretty well for a car dealer.
4. Does my salesperson benefit from financing my car purchase?
This benefit depends on the dealership. Most of the time, your salesperson only benefits from the price of the car, the warranty, and some high-markup items. These mark-ups are things like undercarriage treatment, upgraded tires, and other products.
The financing department is the group of people responsible for getting quotes and delivering them to the salesperson. It is likely to be the folks who receive any kind of commission on the financing. In these instances, it’s also very likely that the salesperson with whom you’re dealing has little to no control over your financing. They might be able to go back to the financing department and ask for a better rate, but this negotiation may not have much success. In any case, someone at the dealership profits from getting you a loan.
5. What is GAP insurance, and is it right for me?
“GAP” or guaranteed asset protection insurance is automobile insurance covering the difference between the total amount of the loan and the value of the car. It protects against the worst-case scenario that you total a car (or if it is stolen), and you owe more than it is worth. Your comprehensive insurance coverage will only pay out the value of the car, leaving you on the hook for the remaining interest and finance charges. A dealer may require you to purchase GAP insurance as a condition of financing your purchase. The cost of the insurance is almost always part of the financing charges.
GAP insurance is for long-term, high-interest, or low down-payment financing. If you are buying a car without putting money down, or don’t have great credit, you should consider getting GAP insurance. But, like any other purchase, you should shop around. Because financing arrangements may require you to purchase GAP insurance, dealerships maintain arrangements with insurance agencies, expecting you to purchase it. It’s one last effort to make money off your purchase, and they rely on you to not notice. You may be able to find better rates on GAP insurance from a broker or another lending institution like your credit union.
6. What steps can I take to avoid being railroaded by last-minute financing changes?
Financing is the easiest place for dealers to make money because it’s almost always the last stop in the car-buying process. They expect you to be both committed to purchasing a car and exhausted from making a series of decisions. High-pressure salespeople use this fact to their advantage. When it comes time to talk financing, frequently, the license plates are off your old car, and you’re sitting down with a sales manager.
While it may seem counter-intuitive, this is the best time to walk away and get a second opinion on financing. If you have not already sought pre-approval from them, see if your credit union can offer you a better rate, lower fees, or a more flexible term. Ask them to commit as much as possible to a price on an offer sheet. Then, tell them you’d like to take some time to think about it. If you return with a cashier’s check in hand, the sales manager may hem and haw a bit. But they’d rather make the sale than make a little extra on financing.
This step is essential if your history with credit is complicated. A giant lending corporation won’t see the steps you’ve taken to solidify your financial position. They don’t have the same relationship with you that your credit union does. They see you as a risk number and an interest rate they can justify, not as a member. Always give your credit union the first chance to beat the dealer’s offer – your credit union works for you, not for a commission.
Now you know the six questions your dealer hopes you can’t answer, you will be more prepared and save more money the next time you buy a car. If you like this post check out the MoneySmart Tips Blog.
