We’ve all heard the TV and radio advertisements from car dealerships promising financing programs with low rates, no money down, or 0% financing—but only if you act now.
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These offers are enticing and lure many car shoppers into a dealership thinking that a loan offered by the car company is the best one out there. But experts say that isn’t likely, and that buyers tend to find better rates from an outside lender.
According to the Consumer Financial Protection Bureau, “when consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third party lender.”
In other words, an auto dealer actually acts a middleman for car lenders. To make money off the loan, some dealers will then offer you an interest rate higher than what they are paying the actual lender—or the financial institution that is backing your auto loan.
This rate increase is typically called the ‘dealer markup’ and can be an additional 3% in interest— significantly increasing the cost of your car. This is perfectly legal most of the time, with only a few states limiting how much a dealership can markup rates.
As a result of this markup, the interest rate on the car loan you’re offered isn’t necessarily related to your credit worthiness, as it should be. Even if you have an excellent credit score, you could be offered a high interest rate compared to the current market rate. And with the average auto loan standing at $26,691, paying an interest rate that’s a percentage or two higher than you deserve could cost you several thousand dollars over the course of your loan.
Complicating matters further, dealers might also sneak additional costs into their auto loans as well, in the form of extended warranties or other unwanted services. Read all paperwork closely to avoid these costly add-ons.
The best way to avoid overpaying is to do some research on car loan rates. You might not be eligible for the best rates, but it will give you a ballpark idea of how much where your interest should be and help identify any potential markups.
Do a bit of due diligence before you ever step foot on a car lot. First, get your credit report and your credit score, so you’re aware of your financial picture. If there are errors on your report, rectify them before trying to secure a loan. Then, shop around to compare offers from several banks, credit unions, or online banks for a car loan. Yes, you can borrow money for a car from an online lender. If you find a better offer, sign up with that lender or ask a dealer to match it.
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