Auto Dealer Financing – Understanding How it Works Can Save You Thousands


A few years ago, I was in the market for a new car. After much debate, my partner and I decided that it would be best to buy rather than lease. This is not always the right choice for everyone, but it certainly was the right choice for us. Luckily, our friend owns a car dealership a few states away and educated us about some common practices in the car business, and how we can avoid potentially huge mistakes when financing a car. Here’s some tips to help you prepare for the negotiations:

1. Get a copy of your credit score before you ever set foot into a dealership. You can get a free copy of your credit report by visiting the websites for one (or all) of the three main credit bureaus: Equifax, Experian and Trans-Union. I did this, and boy was I glad. My credit history was pretty spotless and my credit score was really high. When I visited one particular dealership, the salesman went into the back office and pulled my credit report. He came back and said grimly, “Well, I have some bad news… you’ve got bad credit. I’m afraid the loan rate that you’ll qualify for is going to be much higher than I expected…there’s really nothing I can do.” I told the salesman he was a flat out liar and asked to see his manager. I was promptly assigned a new salesman. Had I not looked at my credit report ahead of time, I could have fallen victim to his lame attempt to puff up my rate. That would have cost me thousands of dollars over the life of my loan, and he would have gotten a nice big commission for his deceitful practices.

2. Join a credit union that works with your local car dealers. Credit unions often give loans (including home mortgages, lines or credit, personal loans and auto loans) at drastically lower rates than commercial banks. They also usually have lower fees overall and much better customer service because they are locally based. Check with your employer, union, school, or religious organization. I even know of a credit union that allows you to join if you are a member at a particular museum.

3. Check your bank or credit union website for their auto rates. This will give you an idea of what the the car dealer will offer as a high end rate. Because car dealers work in volume, they typically buy the loan rates from banks at a drastically reduced rate. Then, when they sell it to the consumer, they add extra percentages and pocket the difference. Typically the end rate is still lower than if you were to just walk in and ask a loan officer for a loan, but it’s possible to get amazingly low rates if you know exactly how to ask for it.