Before you buy your next new car you’ll probably spend a lot of time thinking about and researching your vehicle – specifications, features, and pricing (and please visit Carjojo for help). But you’ll most likely spend almost no time thinking about or planning for financing your vehicle. Big mistake!
A new car dealer may make just a few hundred dollars in profit on the “base” markup of your new car, or even less. Doesn’t sound like much, does it? But, the dealer makes money – often a lot of money – on the extras that you buy, such as maintenance plans, extended warranties, dealer installed options, and your trade-in.
One of the biggest profit items in the “basket of goods” that you buy when you buy a car comes from financing your vehicle through the dealer – in fact, according to the National Automobile Dealers Association, nearly 30% of the profit that dealers make from new cars comes from financing.
Who’s the lender?
Mind you, a dealer is not actually loaning you money. In the background, a bank or other finance or leasing company is the real money source. But the dealer gets a fee on the transaction, and that fee can be large – sometimes the largest profit component of the overall new car transaction. And it’s in the dealer’s best interest to make the most money he can on the financing, especially since, to many people, financing terms and rates are a confusing mess that a person wants to spend as little time thinking about as possible.
So how do you manage the confusion?
- If you can afford to pay cash for your vehicle, you avoid all financing costs, and you should strongly consider doing so. The exceptions to this rule are if either the manufacturer is offering some fantastic financing terms to finance via the dealer, such as 0% interest or super aggressive lease payments (which is not uncommon), or if you have such a great alternative use for your money that it’s better to take a loan and use your free cash for other investments.
- If you need to finance your vehicle, get pre-approved from at least one lender, and preferably two, before you set foot in a dealership. Banks, credit unions, even auto insurance companies, often offer very competitive rates and on-line pre-purchase approvals.
By knowing your alternatives, in advance, you can more easily determine if the financing offered to you by the dealer is a wise move on your part or not.
You can and should negotiate financing
One other thing to remember – the financing rate at a dealer is often negotiable. So if your bank rate is 5% and the dealer quotes you 6%, feel free to show him your bank approval and ask him to beat the rate. You may be quite happy with the answer!