Why Car Dealers Want You to Finance: Benefits, Advantages & Tips

Introduction

When it comes to buying a car, many people assume that financing through a dealership is more expensive than going directly to a bank or credit union. While this may be true in some cases, there are several benefits to financing through a car dealership that can make it the better option for some buyers. In this article, we will explore why car dealers want you to finance, what the benefits are, and how you can get the best rate when financing through a dealer.

The Benefits of Financing a Car Purchase Through a Dealership

Financing a car purchase through a dealership offers some advantages that are not available when dealing with a bank or credit union. Here are some of the benefits of financing through a car dealership:

Lower Interest Rates

Dealerships often have access to lower interest rates than banks and credit unions, especially if you have a good credit score. According to a study by Experian, the average interest rate for a new car loan through a dealership was 4.18% in 2019, while the average rate for a bank loan was 5.17%. This could save you hundreds of dollars over the life of the loan.

Easier Approval Processes

Another benefit of financing through a dealership is that the approval process is often easier than with a bank or credit union. This is because dealerships have relationships with multiple lenders and can shop around to find one that is willing to approve your loan. Banks and credit unions typically only work with one lender, so they may not be able to offer you the best rate.

Access to Special Offers

Many dealerships offer special financing offers that are not available through banks or credit unions. These offers may include zero percent financing, reduced interest rates, or other incentives. It’s important to research any special offers before making a decision, as they may come with restrictions or other conditions.

More Flexible Repayment Options

Finally, dealerships often offer more flexibility when it comes to repayment options. For example, some dealerships may allow you to defer payments for a certain period of time, or they may offer extended terms that can reduce your monthly payments. This can be beneficial if you need extra time to pay off your loan.

Understanding the Advantages of Financing Through a Car Dealer

When you finance through a dealership, you are dealing with a full-service dealer. This means that the dealership handles all aspects of the loan process, from negotiating the loan terms to setting up the payment plan. This can be beneficial, as it eliminates the need to deal with multiple lenders or loan servicers.

Lower Risk to the Lender

Another advantage of financing through a dealership is that it reduces the risk to the lender. When a dealership finances a loan, they are essentially taking on the risk of default. If the borrower defaults on the loan, the dealership will be responsible for repaying the lender. This makes dealerships more attractive to lenders, which can lead to lower interest rates and better loan terms.

More Options Available

Finally, financing through a dealership provides more options to borrowers. Dealerships often have relationships with multiple lenders, so they can shop around to find the best rates and terms. This can be helpful if you have less-than-perfect credit, as dealerships may be able to find lenders that specialize in subprime loans.

Exploring Why Car Dealers Push Financing Programs

It’s easy to see why financing through a dealership can be beneficial for buyers, but why do car dealers push these programs so hard? There are a few reasons why dealerships are so eager to offer financing options.

Profit Margins

Dealerships often make money from financing programs by charging fees and markups on the interest rates. According to a study by the Consumer Financial Protection Bureau (CFPB), dealerships often charge “dealer markup” on top of the interest rate offered by the lender. This allows them to increase their profit margins on each loan.

Recurring Business

Another reason why dealerships push financing programs is that it can lead to recurring business. When customers finance through a dealership, they are more likely to return to the same dealership when it’s time to buy a new car. This leads to more sales for the dealership, which increases their profits.

Customer Loyalty

Finally, offering financing programs helps build customer loyalty. When customers finance through a dealership, they are more likely to return for service and repairs. This helps create a long-term relationship between the dealership and the customer, which can lead to increased sales over time.

How Financing Through a Car Dealer Can Help Your Credit Score

Financing a car purchase through a dealership can also be beneficial for your credit score. Here are two ways that financing through a dealership can help your credit score:

Improved Credit Utilization Ratios

One way that financing through a dealership can help your credit score is by improving your credit utilization ratio. This is the amount of your available credit that you are using. By financing a car purchase through a dealership, you can increase your total available credit, which can lower your credit utilization ratio and improve your credit score.

More Opportunities to Build Your Credit History

Financing through a dealership can also give you more opportunities to build your credit history. Having a longer credit history can help boost your credit score, as it shows lenders that you are a reliable borrower. By financing through a dealership, you can add another loan to your credit history, which can help improve your credit score.

Tips to Get the Best Rate When Financing Through a Car Dealer

If you decide to finance through a dealership, there are a few things you can do to ensure you get the best rate possible. Here are some tips to help you get the best rate when financing through a dealership:

Shop Around

The first tip is to shop around and compare rates from different dealerships. This can help you find the best rate and terms for your loan. Don’t be afraid to negotiate with the dealer to get a better rate.

Negotiate with the Dealer

Once you’ve found the dealership with the best rate, don’t be afraid to negotiate with the dealer. Many dealerships are willing to negotiate on the interest rate and other loan terms. It’s important to remember that dealerships are in the business of making money, so don’t be afraid to ask for a better rate.

Check Your Credit Report

Finally, it’s important to check your credit report before financing through a dealership. This will help you identify any errors or issues that may be affecting your credit score. You should also be prepared to provide proof of income and other documentation when applying for a loan.

Comparing Financing Options: Dealer vs Bank

When deciding whether to finance through a dealership or a bank, it’s important to compare the different options. Here are some key differences between financing through a dealer and financing through a bank:

Interest Rates

As mentioned earlier, dealerships often have access to lower interest rates than banks and credit unions. This can save you money over the life of the loan.

Fees and Penalties

Dealerships may charge additional fees or penalties for late payments or missed payments. Be sure to read the fine print and understand any additional charges that may apply.

Loan Terms

Finally, dealerships may offer more flexible loan terms than banks or credit unions. This can be beneficial if you need extra time to pay off the loan or if you want to reduce your monthly payments.

Conclusion

Financing through a car dealership can be an advantageous option for many buyers. From lower interest rates to more flexible repayment options, financing through a dealership can be beneficial in many ways. Understanding why dealerships push financing programs can help you make an informed decision when purchasing a car. Finally, taking the time to compare financing options and shop around can help you get the best rate when financing through a dealership.