Federal Auto Loan Blog

In a car loan market that features a wide variety of finance companies, most car buyers still use dealership financing. Convenience is the number one motivator for people to make the financing arrangements at the same location where they bought their car. Some financial experts and consumer advocates, however, advise against using dealer financing as it comes with higher interest rate, and opens the door on a flood of unnecessary fees, and options. There are still some holdouts on the virtues of dealership auto financing and there may be times when getting a car loan through the dealership can be advantageous.

Dealer financing doesn’t work in the same manner as car loan from a bank, credit union, or finance company. The money for dealer financing doesn’t come directly from the dealership. Instead, car dealerships partner with a number of banks and finance companies, and pass a loan application to these institutions for one of them to pick it up. The bank that accepts the application quotes an interest rate to the dealership, and the dealership’s finance & insurance department quotes a higher rate to the applicant.

Why the two rates? The rate quoted by the bank that picks up the loan is known as the buy rate, and the rate quoted to the customer is called the contract rate. From this rate, the dealership’s finance & insurance, or F&I manager draws a commission, since it’s the salesperson that reaps the commission from the sale of the car. Usually, the higher rate is one, or two percent higher than the buy rate. In some cases, however, the F&I manager gets a little grabby and shoots for a contract rate four or five percent higher. It’ the right of the customer to know what the buy rate is, and negotiate with the F&I manager to reach a price both can live with. F&I managers won’t go for a zero percent increase – they have to eat too.

Fee stacking and payment packing are two areas where the customer has to careful. All dealerships charge a document fee just like any other lender. These fees cover the actual labor in setting up the loan, and shouldn’t be any higher than $200. Additionally, the F&I manager may add other fees that seem inexplicable. If the customer thinks a fee is unwarranted, that person should pin the F&I manager down on the charge, he or she should ask that it be removed from the agreement. If the F&I manager won’t budge, it might be time for the customer to bag the deal all together, and go to another dealership. The tune may change when the sale is about to go down the tubes.

The upside to dealer financing, apart from the convenience, is that dealerships have access to manufacturer backed financing incentives which can easily offset the increased interest rates. These incentives are usually associated with certain car models, and trim lines. They can take the form of reduced interest rates, cash back rebates, and cash towards a down payment. Depending on the time of year, these incentives can make dealer financing an viable option for many consumers – even those with bad credit.

Not directly related to dealer financing, the consumer can apply for a car loan directly from the manufacturer. These loans work like any other car loan with the added bonus of having discounts and incentives aimed at certain car models. Manufacturers have established their own financing arms to better control the sales of their cars. If a certain model has low sales numbers, incentives are attached to the financing arrangements to get them out the door. Manufacture financing also frees the consumer from the shenanigans that can occur at the dealership’s F&I department, removing a layer of stress from the whole process. All car loans are finalized at the closest dealership to the buyer that carries the car he, or she, has purchased. It’s only a bit more complicated than ordering a product from a catalog.

The consumer always has to be a smart shopper, especially where tens of thousands of dollars are concerned. The first dealership the consumer goes to for a car purchase may not have the best choices in cars and financing. That’s why each consumer must shop around. The internet makes this doubly easy since most dealerships feature their best deals on their websites. Leaning on convenience might cost more money, but learning a little about dealer financing can make dealer financing a reasonable alternative.

All cars have a price tag on them like any product. But unlike most products, most people don’t pay the sticker price of the car. Instead, an arcane dance ensues between car shopper and salesperson to come to some sort of agreement over a final sale price. This same dance does not go on over a bottle of milk, or a loaf of bread. If you tried this at your local supermarket, the sales staff might have you hauled off to the nearest psych-ward. The problem with car pricing is that it’s not a black and white issue. There are many factors in how a car’s sticker price ends up in the window.

The sticker price is not the MSRP. The MSRP, Manufacturer’s Suggested Retail Price, is exactly what it says it is – a price point set by the manufacturer based on the cost to build the car, and a carefully calculated profit margin. It is not a hard value the seller must use. The sticker price is based on the dealership’s profit calculations, the demand for a particular car model, and local economic conditions. A car lot in an affluent area may be able to add a significant profit margin to its inventory, while a car lot with a high middle class demographic may cut profits a little closer to the bone. With this kind of fluidity in pricing it’s no wonder haggling has become part of the game.

Then there’s the invoice price. This is the price the dealership pays for a car – well, not exactly. It is the actual price the manufacturer charges its partner dealerships when the dealership takes delivery on its inventory. But, this price is heavily augmented by other factors that ensure good business relations between the manufacturer and it’s partners which lead to a car dealership being able to sell a car below factory invoice.

If you’ve ever wondered why a dealership can sell a car below its cost, you’re not alone. The manufacturer pays its partners a certain amount of money to keep their dealerships fluid. This can help save a dealership from bankruptcy should there be a sudden drop in business which can happen over the course of a single fiscal quarter. This money is referred to as the dealer hold back and is forbidden territory to the car shopper who wants to dicker over prices. This is the life blood of a car dealership which is specifically allocated to keep the lights on, the showroom doors open, and the employees paid.

Dealerships also receive factory incentives to sell more cars. This money is often advanced to dealerships during sales events, or when their dealerships meet certain target numbers on specific car models. These are designed to be passed on to the customer to encourage them to buy cars that may not be moving according to projected numbers. Incentives can take the form of cash back rebates, or low interest rate financing. As marketing tools, incentives have a certain amount of success in getting the customer to feel that they have come away from the sale feeling good about the deal they’ve just struck.

The complexity in the pricing of cars is the result of the price points of cars. These are expensive pieces of property that are heavily regulated and taxed. Cars have to meet minimum safety standards set by the Federal and state governments as well as meet fuel consumption and environmental standards. The nature of a car purchase almost guarantees that you will seek financing in order to make that purchase practical which adds a further layer of regulation. A sale that has as much involved in it, as a car sale, requires a more intricate price structure than most other products. This ain’t no loaf of bread you’re buying.

This is why you need to no something about the car you’re trying to buy. You don’t have to become an expert auto mechanic, you just need to look up a little information about your car, and some facts about financing. The information available to you is no more difficult to access than anything else on the web. Kelly Blue Book, Edmunds, Consumer Reports, even the NADAGuides, can be accessed at anytime from anyplace…even your smart phone. Expertise isn’t necessary in order to get a nice car at a good price; just a little useful knowledge.

As Summer approaches, dealerships are starting to launch their Summer driving campaigns. These include bombing the airwaves with ads about great specials, and staging sales events on their lots. Though their sales events are littered with balloons, free food, and clowns, it’s important to step away from the entertainment side of things and concentrate on the real purpose for your trip – saving money on a car purchase.

Summer marks the close of the model year for most manufacturers. At this point in time dealerships begin the push to meet target numbers for the manufacturers that supply their inventories, and to clear space on their lots to make room for the new stock coming in. While prices get cut, there are also advertized incentives, reduced rates on car financing, even price cuts on option packages. These sales are meant to move product as quickly as possible which puts some ammo in your bargaining arsenal.

Dealerships rarely have a single Summer event. They often have a series of monthly or biweekly sales to clear inventory so, you have some choices to make as to when to visit your local car lots. Competition is the rule of the game, even between two dealerships that work for the same manufacturer. They all have target goals to meet in order to get money, in the form of incentives and bonuses, from their respective manufacturers. Your target is whoever is selling the car you want at the lowest price.

Just because a car has been reduced in price, doesn’t mean there isn’t some room to negotiate on the final sales price. All dealerships operate at a certain profit margin, and while no car salesperson is going to sell a car at a loss, there is room to maneuver. On the price of new cars, salespeople are trying to work as closely as possible to the MSRP, Manufacturer’s Suggested Retail Price. This is the high point of their profit margin. Remember that the ‘S’ stands for suggested and it’s from this point you do you negotiating.

Between this price and what the dealership makes, there can be a couple of thousands of dollars in the wind before you hit the dealership’s hold back point. From this amount of money, the dealership draws the funds to pay employees, keep the lights on, and the doors open. This is forbidden territory and it’s a line you will never cross. It’s the invoice price of a car you should be aiming for which is substantially lower than the MSRP. Edmunds has a system of calculating the invoice price of a car since it’s very difficult for even the most savvy car buyer to figure that out alone. Be comfortable with knocking some dough off the sticker price, but don’t get greedy.

While there are a number of financing offers available from the dealership during a sales event, getting the car loan first is still your best bet for getting a better interest rate on your car loan. Whether your credit is good, average, or bad, you’ll have the best chance at getting an APR that’s 2% to 5% lower than what the car dealership will offer you. This is due to the fact that you’re getting your loan from the source rather than through a middleman. The dealership does not provide funding for the car loan itself. Instead it gets the financing through one of several partner banks, or finance companies.

The interest rate that a dealership will quote to you will be a few percentage points higher than the rate offered by the bank that picks up the loan. The bank offers the dealership a buy rate on the loan. The dealership’s Finance & Insurance, or F&I, manager quotes a contract rate to you drawing a profit from the difference between the two rates. There are some instances where the dealership might be your only hope of financing, but with the current state of consumer credit score averages, more lending companies are making subprime auto loans available to a wider range of clients.

If you’re in the market for a new, or newer car, you’re about to head into a good time of year to make the purchase with the possibility of saving a few hundred dollars. Though you may just blow off the car ads on TV, or line the cat box with their sales pages, take a little time to read through their offers – and their disclaimers. A little care and research can point you to a good deal on a car to replace your old beater with a car that’s more likely to get you to and from work, and carry you on your vacation without wondering if it’ll fall apart along the way. Sales ads aren’t just for decoration, they do contain some nice bargains which can make your Summer a little sunnier.

A standard car loan is 48 months. This number is arrived at based on the average amount of depreciation of new cars, and the average lifespan of used cars. It’s not predicated on a car dying at the end of a 48-month loan’s term, but is based on the car being worth more than the balance owed on it during the course of the loan. Within the first year of a car loan, there is a brief period of time where the car will have negative equity in it. However, as the balance is reduced through each monthly payment, the owner finds him, or herself having a car that’s worth more than what’s owed on it – an ideal position to be in. The situation changes when the car loan comes with an extended term of 60 months or more.

According to AutoNews, the number of consumers opting for 60+ month loans has increased since April 2012 with the biggest increase occurring among 72-month and 84-month auto loans. The primary factor for the growing trend in extended term car loans is consumers searching for a low monthly payment. However, hanging all their hopes for affordability on the monthly payment can lead to financial misery by the time the loan comes to a close. If all goes perfectly in the life of the car, there are few worries as the consumer will get some trade-in value when it comes time to replace the car. But, how often do things go perfect in the life of a car?

One of the key problems with an extended term, new car loan is that it’s an investment in an asset that’s guaranteed to go down in value. A new car loses 20% of its value the moment it’s driven off the dealership’s lot. The car continues to depreciate by a minimum of 10% for each year of ownership. The term of a car loan is a race to pay off the car before it’s no longer worth paying for. Each mile the car is driven is another mile where the car can be damaged or destroyed in an accident, or lost due to theft. An extended term car loan is an invitation to disaster ready to strip away every bit of value the car may have. Of all disasters in the world of car ownership, being underwater is the worst.

Being underwater is the common term for having negative equity in a car. A car that is the victim of a major mechanical breakdown, or a serious car collision is virtually worthless. If this happens when there is an outstanding balance on the loan, the lien holder may demand that the owner pay off the entire balance. This may sound dire, but the most common solution for this problem is to roll the remaining balance into the next car loan. This means paying interest on the new balance and the remainder of the previous balance. If the borrower has had a drop in his, or her, credit rating, the new loan will be made at a higher interest rate – more money flushed down the drain.

Many dealerships will steer the customer’s attention to the down payment in order to keep up car sales. Through the monthly payment, a good salesperson can make the customer think a car is affordable when it really isn’t. In the midst of a recession, many consumers will seek to create an artificial sense of affordability by pushing down those monthly payments with an extended term car loan, when the most important aspect of a debt should be to dispose of it as quickly as possible. When it comes to affordability, the consumer is better off buying a car that costs less in order to make monthly payments smaller. Comforting one’s self with a low monthly payment when an extended term auto loan will add thousands of dollars, and tons of risk to their burdens will make the new car experience less of a joy and more a nightmare.

New car loans and bad credit don’t really go together. A car doesn’t always until perfect economic times to break down. In fact, it seems that a car will give up the ghost at the worst possible times, when money’s short, and debt has piled up. With new car prices averaging $28,000, the costs of new car loans for bad credit borrowers is very high as interest rates for bad credit car loans can climb into double digits. While many lenders have loosened up their standards for approving loans, they haven’t reduced interest rates on their car loans. Similarly, car dealership financing has fairly loose standards for approving car loans, but they have higher than average interest rates across the board.

With bad credit, you must place a great deal of consideration toward the limits your budget places on your purchase. While your income has no bearing on your credit rating, it must be large enough to cover the costs of monthly loan payments, tax and registration, insurance premiums, and interest. Getting approved for a new car loan, your lender may require proof that your income can, indeed, meet the financial burden of the loan including the higher interest costs your bad credit brings to a loan.

Banks and finance companies divide borrowers into one of four groups that are less complex than those used in advertising. Instead of good, or perfect credit, borrowers at this level are referred to as prime borrower. People with average credit are known in that industry as non-prime. There is often a divide in credit advertisements between poor and bad credit yet, the industry identifies both groups as sub-prime if they don’t measure up to non-prime standards. Below that is the deep sub-prime category where those borrowers effectively have no credit.

Of course, these categories are based on the credit scoring systems FICO, VantageScore, ScorePower, and PLUS. Each of these systems have different score ranges and apply the four basic credit standards to those ranges. In spite of the variations, their scores are fairly close allowing lenders to make accurate judgment calls on your credit when all scores are compared. Your scores are available for your use from the credit reporting bureaus, Equifax, TransUnion, and Experian, for a nominal fee. It’s important that you order your scores from all three companies in order to get the best picture of your credit health – your lender will look at all three too.

There is a wide variance on the amount of interest you can be charged for car loans with bad credit depending on local, and state laws. Bad credit auto loan rates are usually set within a maximum allowable percentage rate over the national prime lending rate. From this point, each lender will set bad credit loan rates based on company policy and local economic conditions. If the local consumer population has a high number of bad credit borrowers, company policy will call for relaxing approval standards and upping interest rates to cover the risk. If any given credit demographic is large enough, it won’t be ignored by the lending industry.

While car dealerships do have higher than average interest rates, you can beat them to the punch and dodge the high-pressure sales tactics that go on at the dealership’s Finance & Insurance manager. The auto makers have established their own financing companies which offer, via the internet, car loans that include programs for people with bad credit. In some cases, the interest rates they offer are lower than if you financed directly through one of their authorized dealerships. However, their car loans tend to be associated with specific car models which can be a plus if you’re interested in one of those models. Additionally, many auto makers apply special incentives and discounts on certain cars, including Certified Pre-owned, or CPO, models.

New car loans for bad credit borrowers are expensive – there’s no getting around that, and you must use all the resources available to save money wherever you can. Prepare your budget to deal with the additional costs your bad credit will bring including that very high interest rate. Shop for a car loan when you’re sure your income is capable of supporting the monthly payments. Do your research on lenders and their policies toward bad credit borrowers, and put as much effort in shopping for the lender as you would your car. Remember, getting approved for a bad credit car loan is the easy part, paying it off is where things get tough.