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.
Banking Deal: Earn 1.30% APY on an FDIC-insured savings account at Synchrony Bank.
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?
Updated April 13, 2016 and originally published May 17, 2011.