2) Dealerships don't want you to have your own financing.
Dealers don't just sell cars, they sell your business to lenders for a profit. They're counting on making money on your loan.
While dealerships often try to hook you on a car you love that may be more than you can afford, setting you up for disappointment (or worse), a bank will work to preemptively prevent such a situation, because they do better when you can make all your payments.
“Car dealerships want you to finance through them for two main reasons: They can make money off the interest of a car loan you get through them. They may get a bit of a kickback if they're the middleman between you and another lender (commission).
With dealer-arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. Alternatively, with bank or other lender financing, you go directly to a bank, credit union, or other lender, and apply for a loan.
What is a good APR for a car loan with my credit score and desired vehicle? If you have excellent credit (750 or higher), the average auto loan rates are 5.07% for a new car and 5.32% for a used car. If you have good credit (700-749), the average auto loan rates are 6.02% for a new car and 6.27% for a used car.
But that's not how car buying works. Dealers prefer buyers who finance because they can make a profit on the loan - therefore, you should never tell them you're paying cash. You should aim to get pricing from at least 10 dealerships. Since each dealer is selling a commodity, you want to get them in a bidding war.
The general rule is that your payment will drop about $20 a month for every $1,000 you put down, based on a 5% APR, but this is subject to individual situations and loan terms. A larger down payment also helps you build equity faster and protects you and the lender against depreciation and potential loss.
These factors are based on your credit score, debt-to-income ratio, and even the type of car you intend on buying. While it may be harder to qualify for a bank loan, it's almost always the better option. For one, you can get preapproved before you even step foot in the dealership.
Yes, just like the price of the vehicle, the interest rate is negotiable. The first rate for the loan the dealer offers you may not be the lowest rate you qualify for. With dealer-arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders.
Bargaining may be an easier price-setting mechanism than changing a posted price every day or week.” Plus, if a customer walks in offering to pay a hair below the list price, the dealer may actually come out ahead by cutting a deal and saving on the inventory cost.
“Unless the dealership has its own financing department, most dealerships get a kickback, or commission, from the lending company for originating the loan. This amount varies depending on the total amount of the car loan but is often a few hundred bucks.
The good news is that you have options: You can get your car loan from a bank or credit union, or you could go through the dealer. Both have their benefits and considerations, and it's best to be informed about financing options before you ask for the keys.
If you tell them you're paying cash, they will automatically calculate a lower profit and thus will be less likely to negotiate a lower price for you. If they think you're going to be financing, they figure they'll make a few hundred dollars in extra profit and therefore be more flexible with the price of the car.
Traditional means dealerships make money off of financing
What the dealer negotiates with lenders is the interest rate they pay, not what the end user, or car buyer, pays. This provides the dealership an opportunity to mark up the interest rate ultimately offered to the client and make money off of financing.
If you're buying a new car at an interest rate of 2.9% APR, you may be getting a bad deal. However, whether or not this is the best rate possible will depend on factors like market conditions, your credit background, and what type of manufacturer car incentives there are at a given point in time on the car you want.
A 10% APR is not good for auto loans. APRs on auto loans tend to range from around 4% to 10%, depending on whether you buy new or used.