Why You Shouldn't Deal With a Dealer

These days, pretty much all new and used car dealerships offer in-house auto finance "solutions." Some of the larger ones maintain their own financing operations, but a majority of auto sellers have exclusive arrangements with financial institutions or loan companies. Either way, the loan is made available for more than just your convenience--someone's going to earn money for providing the service, which you'll pay in the form of interest. And for the same reason stores in malls charge a little more than free-standing outlets, the convenience of being able to secure a loan in the same air-conditioned office in which you bought your car will probably mean the interest rate will be higher.

Not in Your Best Interest

An arrangement between a dealer and a lender is a win-win situation for both parties, because the lender is handed business without having to make any kind of effort to get it, while the dealer usually gets a monetary kickback as a reward. However, not everyone comes out a winner in this partnership. To come up with the dealer's financial incentive, the lender often bumps up the interest rate by a few points, which will end up costing you hundreds or thousands of dollars more by the time the loan is paid off. Sometimes the dealer is given the freedom to jack up the interest rate as high as they want. And since the money earned by the added percentage points is split between the dealer and the loan company, the dealer has every reason in the world to milk each customer for as much as his or her naiveté will allow.

Hidden in Plain Sight

While the practice of draining customers' financial assets over the life of a loan might seem a bit unethical, it's not illegal because it isn't really kept hidden from the person it's victimizing. Appearing in loan documents as a "yield-spread premium," the extra percentage points usually go unquestioned by car buyers who haven't done their homework, are more interested in ending the ordeal than paying attention to the details of the loan, or are simply too excited about their new purchase to focus on the paperwork.

For their more observant customers, dealers will usually explain the markup by saying their credit scores aren't strong enough to qualify for the advertised rate. A common trust-earning tactic employed by salespeople is to suggest that the customer go to an outside lender, where they'll likely be offered a similar rate for the same reason. The salesperson will usually follow the suggestion by saying the vehicle in question likely won't be available much longer, stripping the statement of any threatening overtones by offering to help find something comparable. The thought of having to start the process over again, coupled with the idea that shopping elsewhere for an auto finance solution would be a waste of time anyway, is usually enough to prompt the buyer to sign on the dotted line.