6 Reasons to Approach Auto Dealer Financing with Extreme Caution

auto dealer financingIf you’re in the market for a used auto, like most people you probably can’t afford to pay all cash. Chances are the car dealer says  that they can help with a convenient loan package. While this is certainly an option worth considering, you need to be cautious. There are several reasons why blindly taking auto dealer financing may not be such a brilliant idea.

You’re a Captive Audience

When you’ve got your heart set on a specific auto, the dealer knows that the sale is nearly wrapped up. You’re raring to drive away, and auto dealer financing is likely right up your alley. There’s no incentive for them to offer you a competitive finance package if they think the deal is already sealed.

However, no matter how much pressure the dealer tries to put you under, the chances are the auto will still be available once you’ve explored other loan options. Don’t let your emotions get in the way of common sense.

The Added Extras Trick

Auto dealer financing packages often include all sorts of added extras, from loan insurance to windshield etching. These extra expenses aren’t always made clear, yet can bump up the cost considerably. Even if the finance seems like a good deal overall, take the time to strip out all these unnecessary additions. Don’t let the dealer tell you that these options are a condition of the loan, as this could be illegal depending on your jurisdiction.

The Verbal Offer Scam

Always, always get any finance offer in writing before driving your new car away. The dealer may tell you that the finance is a formality and that there’s no reason to wait. The problem is, once you’ve driven the auto from the lot, you’re obliged to go through with the purchase.

It’s not unknown for the attractive finance deal to fall through. This could leave you forced to accept whatever backup loan the dealer offers, and it’s unlikely to be a great one.

The True Cost is Hidden

Auto dealers are usually very keen to quote you a monthly cost for owning your new vehicle, rather than telling you the total amount you’ll pay over the lifetime of the loan. They know that you probably won’t notice a few dollars extra every month. However, this can add up to a large amount of money over several years. Always make sure you get a quote for the total price AFTER financing.

Poor Range of Finance Packages

The range of auto loans available at a dealership will be aimed mainly at low credit and bad credit customers. This stands to reason – if you have an excellent credit score, you’ll probably take a loan from your bank in any case, as it’ll be much cheaper.

The problem comes in the middle ground. If your credit is reasonable but not stellar, you may be a talked into taking an expensive loan which is far more suitable for those with credit problems.

Commission on Auto Dealer Financing

Lastly, don’t think of auto dealer financing as just a way to help auto dealers to clinch the sale. In fact, they often make more money on the finance than on the auto itself. Dealers will usually get a commission fee for every loan they sell, and they’re also allowed to add up to 2.5% onto the headline interest rate of any loan they arrange. Clearly, in many cases these loans are very profitable for the dealers, whether or not they’re kind to your wallet.

If you can afford to pay for your next auto in cash, then you’re in an excellent bargaining position at the used car lot. However, most people will need auto dealer financing of some kind. Taking a combined auto and loan package from a dealer may seem convenient at the time. But you need to beware of the pitfalls outlined above if you want to avoid being ripped off. ♦