Monday, March 21, 2022

Car Dealers Don’t Finance Purchased Vehicles

They’re Middlemen that Broker Finance Contracts to Banks

Some readers of my column may already know this, but it’s surprising to me that many don’t: Car dealers lead their buyers to believe that they’re financing your purchase. After you buy your car, you’re led to the finance office. The inside vernacular term for the finance office amongst dealers is “THE BOX” (my illustration above is from the classic film “Cool Hand Luke” as Paul Newman is led into "The Box"). They take your credit statement and ask you to sign finance contracts. 

(To be totally accurate, there is a very small percentage of car dealers, typically used car lots that sell lower priced cars to buyers with poor credit that do finance the cars.)

What they don’t tell you is that they sell that finance contracts to the real bank at large markup. They also sell you services like pre-paid maintenance, GAP insurance, and extended service agreements, which they add to the finance contract that they sell to the bank. Normally the profit from their markup to the bank is far more than their profit on the car they just sold you. AutoNation, the largest auto retailer in the USA, averages over $2,000 per vehicle sold on brokering their customers’ finance contracts to banks.

My advice to you is to eliminate the dealer-broker, the middleman, and finance your car directly with the bank or credit union. You can pocket that average $2,000 kick-back your dealer receives from the bank by getting a much lower interest rate and not being sold overpriced warranties and maintenance contracts. Also, remember that $2,000 is an average profit on all cars sold. Some buyers (too few) are savvy enough to finance their purchase with their bank or credit union and others pay cash. In reality, the profit per dealer brokered sale closer to $4,000.

You should check with your bank or credit union before you buy your next vehicle. This way you can shop banks just like you shop for your car. You can get preapproved for the amount you intend to finance. Knowing your interest rate and terms before you buy your car arms you against the pressure from the salesman and dealer finance manager who will try to persuade you to finance your through the dealer. Telling the salesman and finance manager that you have a low interest rate from your bank or credit union will save you a lot of time and aggravation. Be aware that most dealers don’t refer to their “finance offices” as such, they tell you it’s the “business office” where you need to “complete your paperwork”.

There’s an exception to choosing to not financing your next purchase through the dealer. That’s for a new vehicles when the manufacturer offers an unusually low interest rate…as low as zero percent. Usually, the manufacturer offers either a cash discount or the low rate. You should do the math, and calculate which is best. Financing for a longer term with less money down skews your decision toward the low rate vs. cash discount.

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