Whether you’re buying new or used, whether it’s the first car you’ve ever bought or your last, you may not know that relying solely on the dealership to help you with financing isn’t always in your best interest. There are plenty of people out there who have never sought out a direct lender for their car loans and may not be aware of some of the things we’ll talk about in today’s blog.
Today on the blog, we want to demonstrate a few facts about why you may want to find your own car loan before shopping for a new or used vehicle.
Did You Know?
When you do your financing through a dealer, dealers often add a “finance reserve” markup of 1% to 3% to the base rate that the lender (the one your salesperson talks to) offers you.
Let’s break down how this works.
When you go into a dealership to buy a car (new or used) and turn to them for financing, they reach out and work with a lender.
The lender provides what is called the Buy Rate, which is the baseline interest rate the lender offers based on your credit score.
The dealership then marks up the financing and provides you with what is known as the Sell Rate, or Contract Rate. The markup on the buy rate is the profit or commission the dealership receives from the lender for setting them up with the loan.
This is one major reason why you should always shop around on your own and find your own answers. But there are others.
The Profit is Focused on the Dealer
Without having an idea of what rate you can get ahead of time, you allow full freedom for the salesman/dealership to be in the driver’s seat of the loan options that you see. This can become a challenge when you’re sitting there, eager and ready to leave with a new car. The convenience that dealer financing brings can save time, but not money. Ultimately, you are the customer, and you deserve the best price, with no hijinks.
Avoid Hidden Costs
You’re buying the car as a product, but you should also consider yourself buying the LOAN as a product. The car you’ll be driving around, sure, but tangibly, the loan is what you’re BUYING. So it’s important not to get lost in the heat of the moment and fall prey to sales techniques.
Everything above regarding the Buy Rate vs. the Contract Rate is all legal. Dealers have no legal obligation to tell you what the original rate from the lender was. According to one 2023 MIT analysis, roughly 78% of dealer-arranged car loans feature a marked-up interest rate.
Protect Yourself When Buying a New Car
One of the best ways you can prevent losing out due to dealer financing is by getting in touch with a local credit union ahead of time to get pre-approved. This allows you to have an exact idea of the rate you have as a baseline, and can provide you with leverage when the salesman comes back with “their best rate.” Another thing you can do is ask the dealer to show you the official lender approval sheet or “buy rate,” to confirm how much, or how little, markup they are putting on your loan.
If you or someone you know is in the market for a new vehicle, you’re in luck! TVFCU often has offers and promotions, and you can save on Auto Loans now! Stay tuned to see what promotions we’ll offer here on our website and on social media! If you’d like to get pre-approved for an auto, boat, or RV loan, we can help! Apply right here on the site or stop into the branch at 10 Jefferson Ave in Batavia to speak with a team member today!
