Getting the Right Car Loan

Recently car dealers have been getting a bad rap on some local and national news shows.  The latest complaint:  Dealers actually make a profit when they sell financing and arrange car loans for customers buying vehicles from them.  The audacity!  Next some news program is going to report that grocery stores make a profit selling milk and drug stores make a profit selling medicines.  Good lord, how can we let abuses like this happen in America?

A group calling itself the Consumer Federation of America suggests that car dealerships practice questionable business ethics when securing loans for their customers. According to the organization's study, "American car buyers are being charged at least hundreds of millions and as much as a billion dollars annually in undisclosed 'finance markup' charges." The study reports that a dealership may secure financing at a certain percentage rate and then add on additional percentage points to boost their profit in much the same way a grocery store might buy milk at one price and then charge consumers a higher price.  The additional points are then paid back to the dealership by the lending institution.   This is not exactly landmark material, but somehow it has "made news."

Luckily, our economic system has given us a way to take care of ourselves when it comes to auto financing issues.  The key procedure:  Shop around.  Securing your financing through the selling dealer may or may not be wise, and the best way to determine which it is comes from a little comparison shopping.

"Our customers frequently finance through the dealership and receive excellent finance rates," says Christopher Burdick, founder and president of AutoHeroes, a company that specializes in the car-buying process. "Consumers can easily take control of the financing process by researching finance rates and shopping around. By exploring loans available through outside institutions, a consumer can use those financing rates to negotiate a lower rate from a dealership."

There is no secret why dealers would like car-buyers to purchase their financing through them-it presents them with an honest profit opportunity.  Many consumers opt for dealer financing because it is convenient and, in these days of manufacturer-sponsored financing deals, also pretty cheap.  But as a car-buyer you are not obligated to obtain your financing through the dealership.  If you come to the dealer armed with knowledge of current interest rates and terms, which are easy to come by in this Internet Age, you can quickly determine if the dealer's financing offer is right for you. 

"Dealerships want consumers to finance through them because the dealer makes money on the financing," Burdick says. "When a consumer is ready to buy and tells the dealer that they have been approved for a certain percentage rate, say 4.9 percent, the dealer will offer 3.9 percent to get the customer to finance through the dealership. In the end, the most important factor for the consumer is getting the lowest financing rate. It really doesn't matter if they go through an outside source or through the dealership."

The important lesson to be learned here: Do your homework on financing before you walk into a dealership to buy a car.  Those minutes you spend researching finance costs could save you thousands of dollars.

Driving Today Managing Editor Jack R. Nerad is the author of The Complete Idiot's Guide to Buying or Leasing a Car.