How Does Dealer Financing Work?

This article will explain the basics of how dealer financing works with key points explained. Although there are more details to each of these topics, this is written for easy understanding.

Car Dealerships Do Not Finance Vehicles

Except in the case of buy here pay here car lots, the mass majority of car dealerships do not financing anything. They sell cars and only accept full payment for a car. When you apply for an auto loan and are approved through a lender that the dealership arranges for you, the finance company gives the dealership a check for the full amount of the car.

Car Dealerships Make Money On Car Loans

When you are approved for an auto loan at a dealership, the finance company allows the dealership to increase your interest rate. Some states, like California, Texas, North Carolina and others, have a cap on the percentage points that the dealer can add to your interest rate. Keep in mind, buy here pay here car lots only have a cap on the maximum rate that they can charge, which can be as high as 30% in some areas.

Rebates Are Not a Dealer Discount

When a dealer has a rebate available, it is a manufacturer’s rebate. This means that the dealership will receive the amount of the rebate from the manufacturer when the car is sold. That’s why it is common that you, as a customer will have to sign a form that you understand that the dealer will keep the rebate on the car, whether it is applied or not. It’s a wise idea to check car manufacturer websites or call a few dealers in other areas to see if there is a rebate available for the model that you’re interested in. It’s not uncommon for a dealer to keep a rebate that you are eligible for to make additional profits.

You Pay for 0% Financing

0% financing is not really 0% financing. Yes, during the course paying your car loan, there is not interest charges (unless you are late on a payment, in which case you will have a default rate of interest). When you accept an offer for 0% or a lower, manufacturer’s incentive interest rate, the finance charges are prepaid and included in the price of the car. This is why when there is a 0% financing incentive offered, it is usually as an “either or” type deal. You can either take the 0%, or get a $3,000.00 rebate to lower the amount financed.

Down Payments are Not Necessary

Car loans are secure loans. There is an asset (the vehicle) that is used as collateral for the loan, which the lender owns and holds the title the lien is satisfied (all payments are completed). Vehicles all have a loan value and the standard used as a reference for loan value is the NADA book, which is updated and published regularly so that lenders and dealers have up to date information about the loan values of vehicles. It is only when the price of the car exceeds the percentage above retail that a lender allows, that a down payment is needed to obtain a car loan.

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