Dealer financing works the same way as traditional financing from any other lender. In fact, dealers work directly through a selected set of lenders, acting as a middleman for arranging the loan. Most dealers do not lend money themselves – that’s a common misconception. When lenders do originate loans, it’s known as “in-house,” rather than “dealer” financing.
As you might expect, dealers are not going to arrange financing out of the kindness of their hearts. The lenders they work with have agreed to let them add a few percentage points to the loan being offered. This is then translated into a cash kickback to the dealer once the final loan paperwork is signed and approved. This is a ubiquitous practice, and not considered unscrupulous or predatory. However, the Consumer Financial Protection Bureau (CFPB) has spoken out against it, in that it may involve discrimination under certain circumstances. In any case, it’s important to note that, when working with a dealer F&I (Finance & Insurance) officer, the interest you’re quoted is often negotiable.
By going to a lender prior to buying a car, you can often save several hundred dollars over the life of a typical auto loan. The lenders you talk to will tell you the maximum loan that they will cover, and then you can shop for a car that fits this budget. At the dealership, the vehicle will typically be paid for via a bank draft from your lender. However, many dealerships have captive finance departments – companies such as Ford Motor Credit and Toyota Financial Services – and in order to sell more cars, they often offer special incentives such as low rate, zero down, or zero percent financing. These are not typically available unless you arrange your loan through the dealer.
If you would like to get pre-approved to finance your new vehicle, we encourage you to consider an online service such as My Car Lender. They allow you to submit your application online, saving you the hassle of spending hours at your local bank or dealer office.
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