Pros and Cons of Dealership Financing

The economy is in the tank at present, but if you have good credit, now's a great time to get a deal on a car. Dealers are dying to sell cars, even if at a big discount. But with the process comes a key question. If you need to borrow to buy your next vehicle, should you seek dealership financing or some private source? Learn what you need to know about auto loans and financing.

Believe it or not, even if you come into a dealership with a pocket full of hundreds to pay in cash, the dealership will still try to get you to borrow the money. Why? Because dealership financing can be a very lucrative part of their business!

Dealership Car Financing

So, does the dealership actually lend you the money to buy a car? Not really. Some low-end used car dealerships do. But a dealer will primarily offer either manufacturer loans, as with GMAC, or they will source loans from banks that they deal with. In the case of manufacturer loans, obviously the car company makes money from the sale and from the interest charged. But in the case of sourced loans, many car dealerships make money by getting participation on the note. That is, the bank makes most of the interest, but the dealer receives some as well. In either event, it is in the interests of the dealership to make sure you get your car financed. That can be a good thing. But it has inherent financial benefits for them as well, and a potential downside for you. Know that going in.

What Are the Pros?

Well, there is no denying that there is a convenience factor to dealer financing. You come in, pick a car, haggle a little with the salesperson, they suggest financing, you take them up on it, and you never have to leave the dealership. In addition to how convenient they make it, they absolutely want you to leave with keys to a new car in your hand. They do not want to turn you down for financing and, so, will do everything in their power to make sure they find you a loan. Why? Because the dealers have never been more motivated to make you happy and to sell a car. But you have to stick to your guns. And you have to be aware that once the sales price is negotiated, there is yet another number to be haggled over: the APR on the loan. That's right! The finance manager will try to recoup some of the money lost on a price below sticker by sticking you with a higher interest rate. If you know that they do this, then you can stand firm on the interest rate that you want and need for your budget. They do not want you to leave without signing. So, be willing to do that very thing to get the best dealer financing.

What Are the Cons?

As already alluded to, car dealerships and auto manufacturers make a lot of money on financing. And once they have you in their office, and you've opted for dealer financing, you are at their mercy unless you are willing to walk out. Be sure you know the interest rate they are using, as well as the number of months in the loan term. Additionally, be careful of an important disclaimer that almost all deals contain: subject to approval. Many times buyers will drive off thinking they came by a great deal. But after a week or two they get a call from the finance manager, claiming that the note wasn't approved. By this time whatever interest rate they have for you now will likely be accepted. They know this. Do you really want that kind of uncertainty?

So, there you have it. Dealership financing is intended to offer another opportunity for the dealer to make money. It is sold as a service to the unsuspecting consumer. But if a consumer wants a good deal on their next car, coming in with pre-approved financing - often easily gained through online lending sources - is the better way to go. Leave dealership financing to the unsuspecting.