Loanosphere - Approved Car Finance and Your Car Dealer

When it comes to buying a car, there is the negotiations to purchase the car, and there is the negotiation for the financing of it. Getting approved car finance is usually a part of buying a car. Dealers know that people are becoming more savvy about the price points for the automobiles they sell. Dealers are in business to make profits and salespeople have to make commission, so another avenue of profit is through the leases and loans of the car you want to buy. The Consumer Federation of America concluded in a recent report, that car buyers are being overcharged by hundreds of millions of dollars in mark up charges upon financing the purchase of their new automobiles.

Before you buy the vehicle, and before you get approved car finance, it is important to understand how dealer financing really works. The key point point to know is that automobile dealers are not banks. They sell cars. The money for leases and loans comes from banks or finance companies. The dealership gets cash for the car from the finance company or from you, if you don’t borrow. So it doesn’t matter to the dealer if you walk in with a fistful of cash, that is not a bargaining incentive for the dealer. In fact, they sometimes get a “finders fee” or a commission from the company that does the financing through them. In addition, when the bank approves your credit, they pay the dealer for the car you buy.

Your approved car finance, does not come from the dealership. Dealers are not approving you for your loan, they are “screening” your credit history, and credit scores , take the information and fax it to the financial institution. They usually are perusing your credit score to determine if you have a serious credit problem so they know if they can realistically continue with the sale. It is the finance company that will look over and approve your loan by checking your credit score, payment history, and debt to income ratio to check your credit worthiness. You will be categorized into 1 of 3 FICO scores. Prime - “A” tier customers are the best rated. Their FiCO score is above 680. Near prime customers are in the range of 620-680. Scores below 620 are subprime and will have a greater difficulty in obtaining financing. Your interest rate will be high and you may need a co signer to get approval.

Dealers do however, influence what you will pay for your financing. The dealer can add a markup to your interest rate, even if you have an excellent credit report. This is known as dealer reserve among the auto industry. The dealer could add 2%, as an example to your interest rate and it will go unmentioned in any documents you sign. It is justified by the industry as a cost of arranging the financing deal. However, no matter what you call it, it is a way for the car dealer to make additional profit to secure your approved car finance and sell you the car you want.

California has a law that sets the fee at no higher than 2.5%. Some auto companies such as Honda Finance Company, GMAC, and DaimlerChrysler Financial set the same ceiling. You can attempt to negotiate this markup, but the base interest rate is determined by the financial institution who is loaning you the money for the car. Not all dealers mark up interest rates, but it is a common practice. The rate varies depending on the dealer’s perception of how much they can get from you. According to the Consumer Federation of America report, minorities are marked up higher than others with similar credit worthiness.

Knowing your credit score is extremely important, because errors in your credit report can make your interest rate on everything you borrow, even a car, higher. Before you buy your car, shop around for the best interest rate you can get on your own from banks and other lending institutions. Knowledge of your own credit rating helps you to know more about what the dealer is doing when they are arranging financing. It is better to have pre approval of your financing before you walk into the dealership. If their interest rate is better, you have more choices. The internet sometimes has the best rates for auto financing. Make sure the site is reputable, and don’t give out your social security number or other personal information, unless you are confident of who you are dealing with. Capitalone.com , credit unions, are competitive in new car loan rates. Bankrate.com gives a list of the best rates. Evaluate the information before you apply. You are not obligated to use the loan, just because you were approved. You are walking into the dealer knowing you already have approved car finance. This puts you at an advantage and give you more financing choices. When you go to the dealer and they have a low incentive interest rate you can choose to use the better deal.

Once you sign the loan or lease agreement, the dealer has nothing more to do with your financial arrangement unless you don’t get the approved car finance. If you are not approved for the car loan or lease, it would be because the lender found an issue with your credit history, your credit score, or your debt to income ratio. If you appear to be a high risk, they will tell the dealer that your application was denied, or may ask that you put down a greater down payment, or you may need a co signer. The lender works through the dealer until you get your payment book. If the finances are not approved, the dealer does not get paid, and even if you have the car to drive home, it is not yours to keep.

Before you go into the dealership take note of a few things to do for yourself.

• know the price of the car
• know your credit score
• secure financing with a bank or credit union
• get an idea of what the insurance will cost you for the car you want

Remember, when you are buying a car, you are negotiating the price of 2 different items. One is the price of the car, and the other is the cost of financing. Go into the dealer, knowing the best price you can get for the car, but also know your credit score. Try to get the approved car finance set up before you buy the car, so that you are in a more advantageous position to get the best deal all the way around. You can also go to myfico.com to get an idea of how much the car financing will cost you based on your credit score and 48 months financing.

• When you go to the dealer, keep the fact that you have approved car finance, to yourself, while you are negotiating.  Tell them you first want to talk price.
• Don’t talk about trade ins.  Tell them you first want to talk price.
• Don’t talk about how much you will be putting down. Tell them you first want to talk price.
• Don’t show how anxious you are to get the car. Act cool about it, like you could take it or leave it. Tell them you first want to talk price.
• They may ask you how much you want to pay per month, don’t give them an answer. Tell them you first want to talk price.
• Don’t tell them how you are going to pay for the car. Tell them you first want to talk price.

Sometimes the dealer will offer you a rebate as oppose to a low rate financing. It might be best to go home and think about which deal is sweeter for you. If the rebate lowers the price of the car, and you have a low rate interest lined up from your own lender, you may get the price of the car for a lower price overall. Sometimes the low rate financing from the dealer might be better. You have to do the math. Subtract the rebate from the price of the car and use the approved car financeinterest rate from your lender to see your monthly cost of the car. Compare that your monthly rate without the rebate, but using the dealer incentive low interest rate. Whichever makes your monthly payment lower, is the choice you want to make.