One of the most common forms of debt is an auto loan. The process for auto lending is one of the least understood amongst Americans and often the most daunting/intimidating.
You found your car. You know the color, trim, sports package. You have your car seat for your 2-year old picked out. Now, you and your significant other are holed up in a dingy auto dealer’s office waiting for him to come back from “4-boxing” you.
The most important thing to understand about car dealers is that they do not earn money on the actual sale of the car. With a wealth of new information out for consumers and private sellers (CraigsList, AutoTrader, etc.) flooding the market with great used vehicles, consumers more than ever are demanding quality vehicles for their dollar. And it has hurt the dealer’s bottom line. Gone are the days where they are able to charge and extra $8,000 on a new vehicle because the purchaser is unaware.
Before purchasing a vehicle, be sure to understand the cost of the vehicle (sticker price, not monthly payment). Understand the impact that different features, trims, stereos will have on it. Great resources include Kelley Blue Book, TrueCar and other online shopping resources (AutoTrader, cars.com).
Don’t let dealers lie. They don’t purchase vehicles at the Kelley Blue Book value. There is a different form of valuation for purchasing vehicles by dealerships and they use the Kelley Black Book (some use National Auto Dealers Association (NADA) valuations). It is often cheaper for them to purchase at auction because there is much uncertainty in the car. They are usually able to, however, inspect the vehicle and have small warranties on the vehicles by the credit issuers who sell them. State laws often change the way dealer auctions are allowed to be run, however. Some states limit the audience to only qualified, licensed dealers while in Ohio, for example, every auction must be open to the public.
Where the dealers make their money, however, is on selling loan products. RewardBus has a full, detailed write-up of the process from a dealership standpoint to show how they make money but I have outlined here some of the key steps everybody will encounter.
Dealers love negotiating from monthly payment. Consumers understand this number because they can fit it into their budget. Dealers love it because they can negotiate poor financial decisions into loan agreements. The most important item in a loan is APR. This is the final cost of your credit. Lowering the monthly term of your payment will lower the APR. Bringing more cash to the transaction will lower the APR. Having a higher credit score will lower the APR.
RewardBus has a lot more information on auto lending for dealers, investors, consumers and finance professionals: