If you have less-than-stellar credit, you’re at a significant disadvantage when you go to a dealer to purchase a car and seek financing through the dealer. Banks or intermediary loan brokers charge dealers a fee to extend credit to a risky customer. Rather than denying someone credit, the company that finances the loan charges risky applicants a higher interest rate. This higher rate is supposed to compensate the lender for the level of risk they take on by offering credit to an individual they believe to be at-risk for default.
The higher interest rate isn’t enough; the loan brokers or banks can charge the dealership an additional fee for approving a risky customer for credit. By agreement, the dealers are not supposed to pass this fee to the customer. No dealership owner in his or her would be willing to take on this added expense without recovering the cost of doing business through higher prices, so that’s what they do. This acquisition fee is often rolled into the price of the car without being itemized; customers are unaware that, due to their credit, they are paying more for the car itself in addition to their higher interest rate.
When it comes to buying a car, you can educate yourself as much as possible about the invoice price, dealer incentives, how long the car has been on the lot, and the local market, but the dealer will always have the upper hand. Even when you think you’ve have a killer offer, the dealership wouldn’t let the car go unless they’re happy with the terms. The economy over the past few years brought difficult times for many dealerships. You may have been able to get fire-sale deals for some time — if you had the means to buy during the time that credit was difficult to come by. Today, however, the market for new cars has returned.
Here is what you can do to avoid some of the hidden dealership tactics:
- Don’t buy a new car. You can spend less money by letting the first owner deal with the worst part of depreciation. Just don’t be penny wise, pound foolish; don’t spend less for a used car that you’ll just need to pay more to service or replace.
- Avoid the dealership. Craigslist is a great venue for finding used cars. The summer is a great time to look, too, as people go off to school where they no longer need a car or as fresh graduates leave their car behind in favor of mass transit options in the city where they’ll be initiating their career.
- Have stellar credit. If you need financing, take steps to improve your credit score now. Having a good credit score saves you from acquisition fees and higher interest rates.
- Buy with cash. Don’t rely on banks to finance your purchase. Again, you can avoid acquisition fees here, but you also avoid interest rates altogether. If you don’t have the cash now but need transportation, buy a cheaper used car with cash and start your own “car payment” saving — $300 every month, for example — and when you’ve saved the value of the car you’d like to buy, pay with your savings.
- Settle for a less expensive car. If money is tight, you don’t need a “luxury” vehicle.
What have been your recent experiences with car dealerships?
Published or updated May 17, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.
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Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke, also known as Flexo, has contributed to PC World Magazine, US News, Forbes, and other publications. 
{ 11 comments… read them below or add one }
The last time I bought a car I pretty much followed this advice exactly. I bought a used, inexpensive car from a private seller off Craigslist in cash. Buying in cash gave me more negotiating leverage and we got a pretty good deal on the car. Several years later and I’m still happy with the purchase.
If you own your home, use your HELOC. Better interest rates and you can take a deduction on the interest paid. What I’ve found odd is that dealers won’t give you a better deal if you’re paying in cash.
I personally work at a dealership and a cash buyer is the worst buyer. When you pay cash we don’t get the opportunity to sell you extended warranties as much as with financing because you aren’t financing and already have a fixed number in a bank certified check. Also we don’t get money back from a cash buyer. We get money back from a finance from the apr. that’s how a business manager gets paid
Used is best, however we have bought new cars, as we drive them for years and years, it has worked well for us. Of course we pay them off as quickly as possible.
I am searching for a new car and have done most of these. I refuse to buy a new car, an I am researching the price. The only thing that I am leary of is Craiglist or newspaper ads.
Jason, I am paying cash and I have found out that the last thing that I tell them , after we have the price settled, is that I am paying cash.
I couldn’t agree with this part more: “Settle for a less expensive car. If money is tight, you don’t need a “luxury” vehicle.” That’s why my next car will be a used car or a very reasonably priced new car. I’m too old to worry about images or keeping up with the Joneses. :-)
In 2006 we bought a 2005 with 11000 miles on it. Got a great price, it’s a great vehicle, and had 4 more years on the warranty. No car payment either. This car needs to last another 5 years minimum. I baby it so I can keep it longer.
About six years ago I purchased a new minivan (with 26 miles on it) and paid cash, thanks to a good trade-in deal and negotiating a good price up front. We STILL had to spend about an hour with the F&I guy who tried everything he could to sell me on an extended warranty (never mind that the car manufacturer’s warranty was excellent already). Ugh…it’s doubtful I’ll ever buy a new car ever again.
as “nice” it would be a buy a new car, i just do not know if i will ever be able to make that choice. there is such a drop in worth the second it is off the lot. as others have also mentioned, as time goes on, i am much less concerned with the car i drive. i still look for quality, but am less concerned with all the “extras.”
Is it legal to charge a loan acquisition fee of $5000.00 when you have less than stellar credit. Can the car dealership do this legally..?
Is it illegal to pass these fees along to the customer? IF so how do the dealers get around it? I think a customer should know they are paying a higher price for their credit. I just don’t want to hide it from my customers.