Car Dealer Financing
Attractive financing offers are used frequently in addition, or as an alternative to, rebates and other incentives. These special rate programs can save significant amounts of money when compared to a traditional auto loan from a bank, credit union, or any other direct lender. A consumer able to take advantage of special 0.9% financing would save nearly $5,000 when compared to a traditional auto loan from a direct lender with a 6.9% interest rate. That is a huge incentive to shop when these special financing programs are being offered. The catch is only car buyers with the highest credit scores are approved to take advantage of these special offers and sometimes the term of the loan is limited, as well. What we are talking about here is manufacturer subsidized financing programs offered through the automaker’s financing division.
The other type of dealer financing involves the dealer directly, and can take the form of “buy here pay here” financing or dealer acquired financing where the dealership shops your credit information to several lenders to get approval, and in theory the best rate. We will go into a bit more detail with that shortly.
Manufacturer Financing
Manufacturers often offer special incentivized financing offers to car shoppers with excellent credit through their financing divisions (GMAC or Ford Motor Credit, for example). Often, these financing deals are in conjunction with or an alternative to rebates and other incentives. These financing offers can be very attractive. Rates are usually lower than what the average consumer can obtain from a direct lender such as bank or credit union. Rates such as 6.9%, 2.9%, 1.9%, 0.9%, and even 0.0% financing are regularly available.
As you might expect there are a couple of catches. The first catch is that these offers are usually only available for “prime” borrowers, those with credit scores that fall above a minimum threshold, such as 680, 700, or 720. Car shoppers with credit scores that fall below the threshold will not be approved for special financing programs, and will have to opt for obtaining a loan from a direct lender. Financing candidates who do not meet the requirements of the financing program are offered the less desirable rebates, which can still be quite substantial, especially on slow-selling or year-end models.
If you have excellent credit, ask your dealer about any special financing programs that might be available. You might be surprised that even current model year vehicles may fall into these programs, especially if automakers are eager to bolster sales numbers or shore-up the sales of a model that has excess inventory.
Dealer Acquired Financing
When car shoppers speak of dealer financing, they are usually talking about one of two different things. Traditionally, the term “dealer financing” meant that the dealership would acquire financing for the car buyer. It did not mean that the dealership was actually the lender, but instead was shopping a variety of direct lenders on the behalf of the car buyer. Dealerships typically have relationships with numerous direct lenders such as banks and financing companies. These relationships allow the dealership to submit a car buyers’ credit information to several, sometimes dozens, of lenders in order to get the approval and ideally the best rate.
A few car dealers have come under fire for “packing” interest rates, which means they add percentage points to the rate quoted by the lender in order to produce extra profit for the dealership, which is sometimes shared with the lender. Packing interest rates occurs most often with sub-prime borrowers (borrows with poor credit scores) because these borrows may have difficulty finding a good rate to start with, and even with a couple of points packed onto the rate it still might be better than what the borrower can attain on their own.
The practice of packing interest rates is now relatively rare. With the advent of the Internet it is now possible to find out within a few tenths of a point how much the interest rate should be, and it is also now possible for those with decent credit to easily and quickly acquire financing before ever setting foot on a dealership lot. The practice of packing interest rates has been regulated in some states, limiting the increase to 2.5% or less.
Buy Here Pay Here Financing
The second type of dealer financing is done by what are called buy here pay here (BHPH) dealerships. Most BHPH dealerships are offering financing directly, with parties involved with the financing other than the car buyer and the dealership. BHPH dealerships are able to offer “any credit is good credit” financing for any car buyer with a steady history of employment, regardless of credit history. The downside is that these buyers will pay more interest than a buyer able to obtain traditional financing from a direct lender. Interest rates offered by BHPH dealerships can sometimes hit 24%. For some buyers shopping at a BHPH dealership may be the only way to obtain a late model car without paying cash and these dealerships fill an important niche.
Fortunately, as BHPH becomes more popular and demand increases, more dealers which offer this service appear in the market. In many metropolitan areas, it is possible to shop several BHPH dealerships to find the one with the best rates, which may be only a few points higher than the rates offered by direct lenders.
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