Many car shoppers don’t realize that, just like the car they drive, the car loan they buy that car with is a product. And like any product, there are dozens of varieties on the market and dozens of places to shop. And it’s one product you don’t want to buy from the dealership, no matter how polite and honest they may be.
It’s not hard to find an honest, forthright car dealership in most places, but even the best and most scrupulous can present some pretty serious problems when you start trying to borrow through them. To start with, dealerships don’t make loans directly; they serve as a middleman between you and a lender. That means you can’t comparison shop and that you usually won’t get the best deal. In fact, that lender might simply look at your credit and refuse to loan to you … which means you can be effectively out of luck at that dealership.
If they don’t work with one bank, though, that might actually be worse. Some dealerships can send out dozens of credit applications while trying to find you a lender, which can in turn ding your credit score. And, ironically, in some cases, that will make it harder for you to get a loan!
If you do get a loan, you’ll likely have to borrow more and do a lot more homework to pay for everything. Because it’s an “indirect” loan, you have to factor in the associated costs of “buying” the loan to your overall borrowing. For example, a dealership may ask you to pay processing fees for the car loan you accept. So you not only have to pay for your car, you have to determine those fees and whether or not those, in turn, have an impact on the taxes you pay for your car.
Things can get much worse when you deal with an unscrupulous dealer. A good example is the practice of “dealer reserve,” where a dealership can add points to your interest rate on a loan solely as a fee they collect. This is not only perfectly legal, they’re not even required by law to tell you this has been tacked onto your loan. Similarly, the fee structure and costs aren’t legally controlled or mandated; they can tell you it costs $5 or that it costs $5,000, and you’ll have no way to know what’s cost mitigation and what’s profit.
In the worst case scenario, it can set you up for fraud. Take the “yo-yo” loan; you seemingly get a great loan from the dealer, only to get a phone call a few weeks later. Your application has “fallen through” and you need to either return the car to the dealer … or sign a new, much more onerous, loan application.
What should you do? Get your financing before you set foot on the lot. This both streamlines the paperwork and gives you more leverage with your dealer. Not only do they not have to worry about you paying for the car, all they have to do is meet your requirements. It’s a much happier, and better, way to get a car.