How Does Dealer Financing Work? A Guide for Car Buyers

Car buyers can take their pick from several financing options, including getting a loan right at the dealership. 

How does dealer financing work and is it a better alternative than a traditional car loan? 

Find out more in the article below. 

How Does Dealer Financing Work?

Dealer financing works just like a regular car loan—you apply for a loan and if approved you pay it back in regular instalments with interest

The difference is that dealers arrange the loan for you. So instead of comparing quotes and filling in multiple online application forms, the dealer will send your application to either 

  • The car manufacturer’s financing division
  • A lender, such as a bank or credit union
  • An online car loan provider or a financing company 

What are ‘Buy Here Pay Here’ Dealerships?

Some dealerships may have in-house financing, allowing the dealership to personally lend you the money for the car instead of contacting banks of car manufacturers. 

This can be a convenient option since you won’t have to make repayments to a third-party lender. 

However, the offer typically applies to certain vehicles only—if the car you have your eye on is not eligible, you will have to get financing elsewhere. What’s more, not all dealers report your payments to credit bureaus, which is important as regular loan payments can improve your credit score

When Should You Choose Dealer Financing?

There are several perks to car dealer financing.

  • Dealers can usually provide better rates than you would get if you apply to a bank or car loan provider yourself. 
  • Some dealerships even offer 0% financing, i.e. an interest-free loan, although more often than not these deals come with certain restrictions. 
  • Unlike banks, dealers are willing to work with borrowers whose credit score is less than perfect.
  • Most car dealers will let you negotiate on the asking price of the vehicle and sometimes even the loan term and interest rate. 

Note: Some banks might also let you negotiate loan terms, usually when you have an account or mortgage with them. The Financial Consumer Agency of Canada advises contacting your bank to check if there is any wiggle room on the loan terms and rates before looking at other financing options. 

Dealership Financing Tips 

How to make car dealer financing work for you? Follow these tips. 

1. Test Drive the Car

You might think that the new ride is perfect for you, but you won’t be sure until you take it out for a spin. In fact, you should visit multiple dealerships and test-drive many different cars to see which one works best for you. 

Once you find the perfect vehicle, you can start negotiating the terms of the loan.

how-does-dealer-financing-work

2. Do Research

In addition to testing the car, you might want to read up on independent reviews and testimonials. Don’t take the dealer’s word when it comes to the car’s specs and performance. 

3. Negotiate with your dealer

One thing that you can’t do with banks and credit unions is haggling. Luckily, dealers are usually open to negotiating since their main goal is to make a sale.  

It is important to be well-prepared for negotiations. So

  • Research interest rates on car loans and the overall cost of loans. Use the information as your reference point for negotiations. 
  • Don’t forget about the price of the car. The RBS suggests comparing car prices at several dealerships that offer the same model to get the best idea of how much the vehicle is worth. 
  • If possible apply for pre-approval with another lender—this will show you the maximum you can borrow and help you set a budget.

4. Review the offer before you sign

When the final loan agreement is ready, the dealer will ask you to sign the paperwork. Make sure you read everything carefully. Look out for clauses such as ‘pending approval’ which might mean that you have not been approved by the lender yet.

In other words, don’t leave the premises until you confirm that you have been approved for the rates quoted and you understand all the terms in the agreement. 

What Are the Downsides to Dealership Financing?

Car dealer financing is not for everyone. The most common cons to getting a loan through a dealership include:

  • Dealers may only offer auto financing on newer vehicles, which are usually more expensive and would require a larger loan.
  • Dealers might require a larger down payment on the car (sometimes up to 30%). 
  • Car dealers might employ pushy sales tactics. Usually, dealers earn a commission both from the sale of the vehicle and from securing the car loan, so they are highly motivated to seal the deal. 
  • Dealer financing is not as secure as banks and credit unions. 
  • If you ever refinance your car loan, you might get less favourable refinancing terms and rates

Dealer Financing Alternatives

If dealership financing is not the best option right now, here are a few alternatives to consider.

Bank

Banks provide the best terms and rates on car loans but reserve these for low-risk borrowers, such as applicants with a strong credit score or steady income. This is not to say that big banks won’t work with bad credit borrowers—for instance, TD offers auto loans to foreign residents and applicants with poor credit. However, you are not likely to get the same interest rates and terms.

How Does Dealer Financing Work

Online Lenders

Online auto financing is convenient and fast—you can compare quotes within minutes without filling in countless application forms or going through face-to-face interviews. Plus, unlike dealership loans, there are no restrictions on which vehicle you can buy with financing. Bear in mind that online lenders might have higher interest rates and fees than banks and dealerships, so you must go through quotes carefully. 

FAQ

How does financing work through a dealership?

When you apply for a loan through a dealership, the dealer will send out your application to external lenders or the financing division at the company that makes the car. If approved, you will get your financed car and the dealer will receive a commission from the lender for securing the loan. 

Is financing with a dealership a good idea?

It depends on your needs and financial circumstances. If you have poor credit and want to negotiate better terms on your car loan, dealership financing may be the way to go. However, if you cannot afford to make a sizable down payment or want to apply for a loan directly from a bank (thus cutting out the middleman), try other financing institutions. 

Why do dealers want you to finance through them?

Dealers make money when they arrange a loan for you, on top of the sales commission they receive. That’s why knowing the answer to questions like ‘how does dealer financing work’ and ‘how much do dealers make off financing’ is crucial before you start shopping for cars. You shouldn’t feel pressured by a pushy car dealer—take your time, compare offers from several dealers (and lenders) and research current interest rates to find out if the dealer’s offer is fair. 

ABOUT AUTHOR

When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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