Car Dealer Finance

Once you have decided on buying a car, you can purchase it by paying cash, leasing it or financing it through a car dealer, a bank, a credit union or may be a family member.

In case you decide to opt for car dealer finance, there are a number of things that you should know and keep in mind.

When you go to a car dealer, he first assimilates your credit information and sends it to the lenders whom they deal with. The lender may be a finance company or a bank. The lenders conduct their own check assessing not only your credit history but also your payment history, debt-to-income ratio, etc. to decide on the rate of interest that they will charge you. The car dealer then selects the lowest approved interest rate and increases it before offering it to you. This hidden fee that a dealer adds is a mark-up that serves as his profit on the deal. This mark-up is never mentioned anywhere in the documents you sign. This earning that comes indirectly from the customer’s pocket in the form of a higher interest rate is called ‘dealer reserve’. Thus you should keep negotiating the interest rate till you get a profitable deal.

The dealer also makes profit by convincing you to purchase warranties, undercoating, alarm systems, etc. These are products that they wouldn’t have been able to sell if you arranged your own car loan.

Before signing the deal with the car dealer, make sure that you negotiate the rate of interest and ensure that the rate doesn’t change during the duration of the loan. Also ask about prepayment penalties. Beware of unlicensed dealers. You might lose your money and your car if you buy from them. Make sure that your dealer belongs to some motor dealer council and adheres to its code of ethics. Despite the disadvantages of taking a loan from a car dealer, there are obvious advantages such as convenience and speed with which you can become the owner of a car.


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