Are you looking for a new or used car? If so, you might be wondering how you can save the most money. You’ve done your research on the car you want, taken it for a test drive, and compared prices so you can negotiate the best deal. While all of these steps are important to take, many buyers overlook this tip that can help you save a lot of money.
You should always go to a dealership with outside financing for your auto loan instead of going through the dealership. Here’s why.
How Car Dealerships Really Make Money
Few people realize that dealerships don’t make the majority of their profits from selling cars. In fact, according to research, dealerships only earn on average about $65 per used car and actually lose about $200 per new car sold! So how do dealerships make money? Their main sources of profit are dealer financing, the sale of extended warranties, gap insurance, additional car add-ons, and other services.
What is Dealer Financing?
Most people don’t have the money to buy a new or used car, so they have to borrow money. Car dealerships will offer you a loan to simplify the process of buying a car. All you have to do is choose the car you want, pay the deposit, fill out the paperwork and the car is yours!
However, many people don’t realize that dealerships usually mark up the interest rate on the loans they take out. This means that you will end up paying more interest over the life of the loan if you go through the dealership. Additionally, if you have bad creditthe interest rate the dealer offers you is likely to be quite high.
A dealer can get 3.5% for a $40,000 car you want to buy. Over five years, that works out to $3,660 in interest. The dealer can then increase the rate to 5%, which equals approximately $5,290. The dealer keeps the difference of $1,630 as profit. This is money that you could possibly keep for yourself by finding outside financing.
How to seek external funding
If you decide to seek external financing, also known as direct lending, for your auto loan, there are a few things you will need to do. First of all, you will have to find a lender. You can use your bank, a credit union, or search online for the best rates. The key is to compare the offers of several lenders at once and choose the one that suits you best.
Once you’ve found a lender, you’ll need to complete an application and provide documentation, such as proof of income and the car you want to buy. Once your application is approved, the lender will send you or the dealer the money which you can then use to pay for your car. Your price will depend on your credit score and other factors. You will generally save more because there is no markup.
If you’re looking to save money on a car loan, seeking external financing is a great option. By doing so, you can avoid the dealer markup and potentially get a lower interest rate, even if you have bad credit. To seek external financing, all you need to do is find a lender and complete an application. You may have to spend more time finding the best financial institution for you compared to getting a loan from the dealership, but it could save you thousands of dollars.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.
We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.