How Much do Dealers Get Paid for Financing My New Car?
If you have ever financed a car from a car dealer you are probably familiar with the theme. You’re escorted into the finance manager’s office and offered a bottle of water. After feeding all of your credit information into his computer, he excuses himself, leaving you to stew in your self-doubt. After 10 or 15 minutes – an eternity to you – he returns with an offer for financing. The only thing standing in the way of you driving off in your brand new car is your signature. You’ve come this far, so you say, “What the heck.”
Even if you managed to dodge the finance manager’s sales pitch for all of the add-ons –the extended warranty, protection package, stolen car recovery system, etc. – you paid too much for the financing.
Dealers are Simply Finance Middle Men
Make no mistake, car dealers make money on car financing – lots of money. Of course the amount varies from one deal to the next, but they expect to turn a profit with every deal. It is important to know that dealers do not originate car loans. They are simply an intermediary – a middleman – in the process, matching car buyers with lenders willing to issue loans based on the credit standing of the buyer. When the finance manager left you alone in his office, he ran to another computer to check on all of the offers from lenders who received your information. He may have received four or five offers, but he chooses one.
Dealer Financing is Big Business
How does he choose between the offers? You guessed it. He picks the offer that leaves the most money on the table for the dealer. As the middleman, the car dealer simply arranges the financing and, for that it earns a commission or a fee. You won’t be shown the offer from the lender, so you won’t know how much the dealer makes, but it is typically the difference between what the rate the lender offers and the rate the dealer actually charges you. A lender might offer financing at 5%, but the dealer will mark it up between 1 and 3%. That can amount to a couple thousand dollars in finance commissions for the dealer. If you finance $25,000 on a 60-month loan, and the dealer marks up the rate by 2%, the dealer earns nearly $1,300.
Your Always Better Off Arranging Your Own Financing
Dealers don’t make as much on special financing offers, but then very few buyers are have the creditworthiness to qualify for those offers. Some states and lenders limit the markup on their loans, while others allow none. In those cases, the dealer earns a small origination fee. The problem is you won’t know the arrangement a dealer has with the lender it chooses for your financing. That’s why it is always in your best interest to arrange your own financing before you shop for a car. Even if you have less than great credit, auto loans offered through banks, credit unions and especially some of the new online-only lenders, will almost always be less expensive than dealer financing. The added advantage is, when you have pre-arranged financing, it’s like walking on to the car lot with cash, which puts you in a much stronger bargaining position.
Written By: Richard Best
Writer For: Easy.Credit