The Tricky Truth About Car Dealership Financing
Don't get fooled by smoke and mirrors in a dealership when buying a new car. There are many tricks you need to watch for. This might include bait and switch traps, 0% financing that comes at a cost, pricey dealer-added options, or shady clauses buried in the fine print.
0% dealer financing can be deceiving
An auto loan with 0% financing? If it sounds too good to be true, it might be a tricky marketing tactic that certain dealers love to use. Some dealerships use 0% financing offers just to get buyers in the door. What buyers may not realize, is that it might be difficult to qualify for the 0% offer. If they did qualify, they'd probably lose any probable savings since the offer might eliminate potential rebates and other incentives. It may also influence a buyer's negotiating power. 0% percent loans may also come with a lower term, making for higher payments.
Don't submit to the dealer financing hard sell
If a dealer is flashing a 0% or very low-interest rate in front of your eyes, consider all fees, costs, and upsells, such as GAP insurance. While 0% financing might mean an inflated vehicle sticker price and "must-have" upsells at some dealers, others may just inflate the loan rates hoping you won't shop around. They might even offer to fold the options or up-sells into your monthly payment.
A dealer may try to deceive a buyer by showing a very low monthly loan payment and then try to negotiate based on the payment. Why is the payment so low? Because they are stretching your term to the max. When shopping, concentrate on the vehicle price rather than the monthly payment. A lengthy term may cause you to go "upside down" on the auto loan in the future. This simply means that you may end up owing more on the auto loan than the vehicle is actually worth. Bottom line - 0% financing might result in a larger markup on the vehicle price and overspending on extras.
While some dealers lure with 0% financing, other dealers may mark up the interest rate significantly. Dealers often partner with third-party lenders, so a 6% interest rate you might get when working directly with the lender might be marked up to an 8% interest rate when financing through the dealership.
Do you really need GAP insurance coverage?
Beware of dealer GAP insurance. GAP, or guaranteed asset protection insurance, basically bridges the gap between what it costs for your insurance company to replace your car if it is totaled and the amount you still owe on your auto loan. If you are financing a vehicle, GAP insurance might be a good idea. Be aware that auto dealers may try to hard sell you GAP insurance when you are purchasing a new vehicle. While you may think it's convenient to add it to your purchase, the downside to this is that it's often at huge markup compared to other sources of insurance. For instance, Spirit Financial provides GAP coverage at a cost of $295, while the average cost at a typical auto dealership can be $800 to $1000. Don't feel you need to agree to purchase GAP insurance at the dealership.
Just like GAP insurance, extended warranties are another way for dealers to make big profits in commissions. According to Consumer Reports, extended warranties are generally a bad deal. Instead of buying an extended warranty, you might be better served by starting an emergency savings fund to cover any unexpected vehicle repair or upkeep costs. You'll probably end up spending much less on your vehicle than the cost of the extended warranty, and you will enjoy the benefit of money saved.
Always get pre-approved for an auto loan before visiting a dealership
It's a fact that auto loan pre-approval will give you more bargaining power when negotiating a price at a dealership. Get pre-approved for a Spirt Financial auto loan today.
When shopping for a loan, take advantage of Spirit Financial Credit Union's CarShop365 auto loan calculator to find your payment. Shop around and keep in mind that a manufacturer cash-back rebate might offer more savings than 0% dealer financing. Contact your credit union today to find the best terms you can be pre-approved for, and then compare offers. Working directly with a credit union to discuss financing before you enter the dealership might help you avoid dealer trickery and save.