Understanding Car Dealership Financing and How to Maximize Savings

Data shows that many car dealers often take advantage of prospective buyers through untransparent financing practices. This article aims to peel back the layers of these practices and provide guidance on how buyers can save money on car loans while protecting themselves from hidden fees and scams.

Dealer Reserves and Hidden Surcharges

Dealers can sometimes add extra charges to the loan rate without your notice. This is often achieved through dealer reserves. When a customer applies for a loan, the finance department of the dealership (which is often run by the top salesperson) will contact various financing sources. Each source will provide a rate based on the customer's credit profile. However, the dealership can legally increase this rate by up to 2 percent without the customer's knowledge. For example, a 3 percent buy rate might be presented to the customer as a 5 percent rate, and this extra 2 percent goes directly to the dealership.

New Car Dealers and Profit Strategies

New car dealers do not actually finance the vehicles but rather arrange financing through various banks and captives like Honda Finance. Their profit comes from the difference between the loan rates they pass on to customers and the rates they themselves pay to lenders. In many cases, dealers have a lower cost of money than the interest rate they pass on to customers, allowing for significant profit margins.

Zero-Percent Loans and Referral Fees

Some dealers may also earn a flat fee for non-bumped interest rates, such as zero percent loans offered by manufacturers. Even in these cases, dealers can still make a profit. They may also try to charge loan fees, which are illegal in many places and mostly used on subprime borrowers who have few financing options.

Best Practices for Dealing with Loan Providers

It is crucial for buyers to demand and disclose the actual buy rate from the finance department. If the department refuses, this is a strong indicator that they are performing the dealer reserve scam. It is advisable to walk away from such a deal and find a different dealership. Always remember that as a buyer, you control the process, and dealers and finance people need you to make a deal.

Conclusion

Dealership financing can be complex, with hidden fees and practices that can be damaging to the consumer. By understanding these tactics and taking proactive steps, buyers can maximize their savings and ensure they are getting the best deal possible. Always stay in control, be informed, and walk away if you don't feel comfortable. Remember, a new car is a commodity, and there are many dealers and finance departments eager to make a sale, but you are the one in control of the process.