Whenever it comes time to buy a car there’s a strong tendency to go with the one stop shopping dealerships offer. But take advantage of that perceived convenience, and you may very well pay far more for the car than you should. Dealerships hawk ridiculously low interest rates on their financing, so low that it often looks like the proverbial no-brainer to just go with what ever their offering. The only alternative is to get your car loan before you buy a car.
Why not just rely on apparently low dealer financing, and save the hassle of applying through a bank or credit union?
You may not qualify for the dealers best financing package
The “come on”, a.k.a, “bait and switch”—organizations who are involved in sales are famous for blasting the promise of their best deal to an anxious world. How many times have you gone into a store or lender lured by an advertised low price, only to walk out having to pay more?
The best price advertised is the one available to the most qualified customers; exactly who those customers are is up to the dealership. It could be only for people with credit scores above 750, or only for the first ten people who walk in the door on a given day. Rest assured it won’t be across the board.
Low rates and prices serve a vital function for businesses: they get people in the door. It doesn’t matter that the best price isn’t available to all customers, only that all customers think that it is.
By having pre-approved financing in place, you effectively establish a ceiling on the rate you’ll have to pay for your loan, regardless of what the dealer will or won’t give you.
The dealer may not want to give you their best financing
Even though you may be fully qualified for the dealer’s best financing package, you still might not get it.
Financing is a major revenue source in the car business, and they’ll often pad the loan to recapture discounts and concessions given to you on the basic price of the car. If you haven’t lined up your loan in advance, the dealer might even be able to convince you that you aren’t fully qualified for the best terms. After all, they’ll have the loan, what will you have to counter their claim?
Having pre-approved financing will force the dealer to give you a better deal if he wants your business. If he doesn’t, you can move on to the next dealer–pre-approved financing in hand.
If there’s a choice between a lower rate and cash back, you can take the cash
Car dealers typically offer you a choice between an impossibly low loan rate and cash back. I saw one this week advertising 1.9% financing or $5,000 cash back. Now I have no idea what the rate will be should you decide to take the cash, but I’d bet real money it’ll be substantially higher than 1.9%, and probably higher than what you can get at a bank.
Though the dealer will likely attempt to make the cash back contingent on you taking their over-priced loan, having pre-approved financing through a bank will enable you to leave and take your business elsewhere. Dealers hate to have deals walk out the door, so you if you play hardball, you might walk out with the car, your bank financing and the cash.
It gives you a position of strength before you walk in the door
When you walk into a dealership you’re at an instant disadvantage. Not only do you go weak in the knees over the fleet of new cars on the showroom floor, but there are people moving and speaking quickly about things you barely understand.
If you find a car you really like, the situation quickly becomes even more unbalanced. You’re sitting across a desk from a salesman who, should he hit on a snag with you, can immediately bring in his buddies, the sales manager and the finance guy. Now it’s three on one—no pressure there, huh?
The best counter strategy is to stack the deck in your favor to the greatest degree possible. When you have financing from an outside source, you’re making three critical declarations to the dealer:
- I’ve done my homework and I’ve come prepared
- Your financing package isn’t the only deal in town
- I have options that I’m prepared to exercise
You’re leveling the playing field by forcing the dealership to respect you.
It frees you up to worry about more important concerns
Car dealerships try to make the buying process seem easy, but in a way what’s really happening is that you’re being disarmed. In truth, there are a bunch of sub-transactions going on under the umbrella of the big picture purchase: financing, options, warranties, dealer upgrades (undercoating and other recommended but hardly necessary add-ons).
In order to limit the chaos that’s really taking place, you need to take as many of those sub-transactions out of the equation as possible, and doing it upfront is the best time to make it happen.
By handling the financing outside the purchase, you’re taking a big one out right away, freeing yourself up to have a clearer head about the others. Remember, dealers will often play with the loan terms as a way of forcing you to take options, packages and coverages you don’t want.
Apply at your bank or another non-dealer source, and get a pre-approval letter. That letter will improve your bargaining power, and force the dealer to offer better loan terms than the bank if they want your business. That’s a win-win for you.
Have you ever relied on the dealers financing offer and wished you hadn’t later?