5+ Reasons to Avoid Car Dealership Financing: Save Money Today

Written by Kim PinnelliUpdated: 29th Mar 2022
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This might go against conventional thinking, but you should avoid car dealership financing. It might seem convenient and fast, but that’s about all it has going for it. Instead, focus on how you can save money and increase your savings by avoiding car dealership financing.

Here are 5+ ways you should get your car financing elsewhere.

What is Dealer Financing?

Dealer financing is financing you get directly from the dealer to buy a car. You walk in, pick out your car, and work out the financing details in the finance office. Most of the time, you can drive off the lot with your new car on the same day. The financing is convenient and fast, but it’s not always the best option.

Is It Bad to Finance Through a Dealer?

It’s not always bad to finance through a dealer, but most people have better options. If you’re in a position where you have a low credit score or a unique personal finance situation, dealer financing may be your only option because they work with hundreds of lenders.

If you have decent credit, an average debt-to-income ratio, and a stable income, you may want to look elsewhere for financing.

>> More: How to Get a Car Loan

Why Do Car Dealerships Want You to Finance Through Them?

Dealerships have one reason they want you to finance through them – PROFIT. They are the middleman between you and the bank. In other words, instead of you going straight to the bank and getting financing, the dealership does the legwork for you, but they don’t do it for free.

Here are the top reasons to avoid auto dealership financing.

Reasons to Avoid Auto Dealership Financing

#1. Higher Interest Rates

Because the dealership is the ‘middleman’ in the process, they make a profit by bringing the bank business. This usually comes in the form of higher interest rates. The higher rates allow the bank to pay the dealership a small commission for the business, but you’re the one paying for the commission over the life of the loan.

#2. Little Time to Compare Options

If you’ve ever sat in the finance office at a dealership, you know the pressure you can feel. Finance managers are highly skilled at high-pressure sales tactics. They’ll make you feel like you’re getting the ‘best deal in the world,’ giving you little to no time to look elsewhere. Unless you’re strong enough to say, ‘let me see what else I can get’ and walk out, don’t step foot in that finance office unless you know it’s your ONLY option.

>> More: Best Auto Loan Lenders

#3. Packed Payments

If you don’t pay close enough attention, you could wind up with a higher payment than necessary because the dealer ‘packed’ other items, such as gap insurance or an extended warranty. They may have even talked to you about it, but you might take it if you don’t understand what they’re saying or aren’t sure if you need it.

It’s usually not necessary, and if you want something like an extended warranty, you can shop around and likely get it for a lower price than the dealer offers.

#4. Dealers Take Advantage of You Not Knowing Your Credit Score

If you aren’t an informed borrower, you could easily get taken advantage of at the dealership. They can tell when car buyers don’t know their credit score or understand the process, taking advantage of it.

How?

They’ll give you a much higher interest rate than you could likely get if you did your research. If you don’t shop around and pull your credit, they will make you feel like they’re giving you the ‘best possible deal’ when the truth is you could likely get a much lower rate somewhere else. Please don’t fall for it.

>> More: How to Get Preapproved for a Car Loan

#5. Additional Fees

Dealers easily sneak other fees into your loan amount, so they make more money. How often do you sit and read every line of a deal, especially when the slick finance manager makes you feel like he’s got your back?

If you don’t pay close enough attention, you could end up with many additional fees on the loans, which increases your payment. Even if it’s only a small amount, stretch that amount out over 2 – 7 years, paying interest for that long, and it adds up.

Do Auto Dealers Make Money on Financing?

Yes, dealers typically make money on financing. It’s the reason they offer it. They work with specific banks that pay them a commission on the loan they secure if they charge a high enough rate. Banks have a base rate that pays the dealer nothing, and then each incremental increase adds to the dealer’s commission.

Most finance managers will try to get you the highest APR they can without seeming predatory, so they make money on the deal.

Should I Apply for Financing at a Dealership?

In a perfect world, you shouldn’t apply for financing at a dealership UNLESS you know there is 0% APR financing available, and you have good enough credit to qualify. No bank will be able to beat that option, so it can be a good time to apply at the dealership.

But, if you don’t have access to 0% APR financing, apply elsewhere. If you want to see what the dealer offers, you can ask for your options, but don’t get stuck signing on the dotted line and driving away with your new car before exploring all other options. If you aren’t strong enough to say ‘well see’ in the finance office, don’t step foot in there until you have your bank financing in hand.

Bottom Line: Avoid Auto Dealership Financing

Most of the time, auto dealership financing is a bad idea. There is the occasional time it’s worth it because you have a unique situation, or you can get 0% APR financing, but it’s almost always best to shop around.

Getting pre-qualified by lenders doesn’t hurt your credit, and it gives you a chance to learn what options you have. Compare your options side-by-side to determine which loan is the most affordable monthly and in the long run.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.