Anyone know how dealer financing works?

[mindaugas]

I'm curious if it's true dealers get a kick back on financing from banks? Our financing fell through at one credit union, moved to another, interest goes from 4.5-7%, payment goes down by $10, dealer lowered sale price of car $1k. I'm guessing they make money off the interest rate. Any truth to this? I'm not mad, dealer has to make money, but next time I go in for a nice car for the wife it would be nice to know. I know, I should have gone in with my own financing, but it was spur of the moment.

[Ascinder]

Like this

[mindaugas]

lol, nice link

I have googled tho

I'm curious if it's true dealers get a kick back on financing from banks?

I figured some of you more experienced VX owners may have some insight.

[mindaugas]

One of the potential "hidden" fees when financing a car is a markup that dealers can add to your interest rate, even when you have a good credit score. This called "dealer reserve" in the industry.

Say the normal interest rate from the finance company used by the dealer is 6.0%. The dealer marks up the rate by a percentage, say 2.0%, making your real rate 8.0%. This markup is never mentioned anywhere in the documents you sign. Car dealers claim the practice is justified to cover the cost of brokering customers' financing. In fact, it's additional profit.

thanks!

[vt_maverick]

^ Never heard of that one (dealer reserve, marking up your APR). I don't see how that's possible with the truth in lending laws that are out there. When I borrowed the money for my car I had to sign a document that listed out the purchase price, all financing fees, the actual APR, and the total amount I would end up paying across the life of the loan. It seems hard to believe that a dealer could mark up your APR from 6% to 8% while you're still signing a document that says 6%. Am I misunderstanding that statement maybe? I knew dealers could apply a "finance charge/fee," but I've only ever seen that listed as an actual dollar value.

In any event, you are almost always better off arranging your own financing. I've used my credit union for three vehicles in a row now and gotten a great rate (4.74%) each time, plus I've got the flexibility to change the payment amount, reschedule the monthly due date if needed, etc. Try that with dealer supplied financing.

[mindaugas]

the doc u sign contains that markup.

[vt_maverick]

Then I wonder how the mechanics of that actually works... does the financing company cut the dealership a check for their 2% each month? Or does the financing company pay the dealer up-front the equivalent of 2% across the life of the loan? Seems like that would be a bad idea because if you pay off early, the bank doesn't get all of that 6%.

[RICHARD PAYNE]

I'm curious if it's true dealers get a kick back on financing from banks? Our financing fell through at one credit union, moved to another, interest goes from 4.5-7%, payment goes down by $10, dealer lowered sale price of car $1k. I'm guessing they make money off the interest rate. Any truth to this? I'm not mad, dealer has to make money, but next time I go in for a nice car for the wife it would be nice to know. I know, I should have gone in with my own financing, but it was spur of the moment.

Yes, dealers get a fee for writing up a loan and if they can get you a higher loan interest rate they get a fee on that too; the same for mortgage brokers. I am a Real Estate Broker and now an auto dealer too. They make a big commission on selling you a warranty, I just learned what they really cost. If you have questions you can email me @ richard@payneinvestments.com. I don't tack on these fees I personally don't feel right about it.

[RickOKC]

I've heard of dealers marking up the interest rate, too, but I didn't have an opportunity to see it firsthand when I briefly worked for the sleaziest dealership in town. (I did witness some of the other slimy tactics you've probably heard of though.)

My first experience as a consumer with extended warranty - years before that - left me with the thought: *cough* SCAM *cough*!

[mindaugas]

meh