With dealership financing, you are granted credit directly from the dealer from whom you are purchasing a vehicle. Payments are calculated using the cost price of the car when it is bought as well as the interest rate. This will then be split between the number of months the finance deal last for. This means the shorter the deal, the higher the monthly payments will be, but the quicker the new car will be paid off.
Alternatively, a longer deal will mean lower monthly payments, but they will need to be paid for a longer period of time. You can reduce the monthly payments by paying a larger deposit at the beginning of the agreement. The higher the deposit, the lower the lower the amount that needs to be paid, and as a result, monthly payments will fall accordingly.
In most cases, the dealership will not loan the money itself. Instead, it will offer manufacturer loans or sell the credit contract to a bank or other company. This why the APR offered by the dealer will typically be higher than what you can obtain by taking out a loan directly from a bank or credit union.
Dealer finance is usually offered in the dealership when you buy a car, and the main attraction with it is the fact that it is convenient. This means you don’t have to waste time visiting the banks or using a third party finance option. In general, dealers are not required to offer the best rates available.
However, dealer finance is a money-making product for dealerships and as such, everything is negotiable. So, you can not only haggle the price of a car but also the rate of APR on the deal. Surprisingly, a research from insurance group eSure shows that only one in 10 of car buyers spend more than one hour researching finance options.
The fact of the matter is, there is no point in haggling on vehicle price if you are simply going to waste it all on a poor finance deal. In addition, be sure to take time to go through things you are not sure about, and get the final offer in writing.
Dealers can offer low interest rates, however, these are generally only available for up to three years, and can be restricted to certain makes and models of new cars. It’s also important to ask dealers if there is a balloon payment required at the e4nd of the loan as this will make regular repayments seem cheaper, when in fact you’ll have to make a huge payment at the end of the agreement. It is also important to ask if there are any upfront or ongoing monthly fees, which can offset a low interest rate.
The only thing at risk if you don’t keep up dealer finance repayments is the car. Bear in mind that even with sweeteners thrown in the dealer will still make money somewhere in the deal and you are paying for it.
Buying a car is one of our biggest packages, so it is important to get the financing right so that you don’t end up paying more than you need to on your new car. You should probably go for dealer finance if you can say YES to any of the following:
- You like the convenience of “package” deals
- You’re happy to do some comparison research
- You don’t want to do any research to find the best deal, and you don’t mind paying extra
Tip: When a dealer advertises special financing rates, it is important to read the fine print. You might find that they are for a particular length of loan, type of car, or only for people meeting a certain credit standard. People are often tempted to just take out a dealer loan on the spot in order to drive away sooner, however a little extra waiting time could save you thousands over the cost of your loan.
In some cases, you may have a choice between a manufacturer’s rebate or a special financing rate such as 0% interest. Shop around for auto loan interest rates before you go to the dealership so that you know what interest rate you could get elsewhere.