6. The finance office
written by Fred Ginsburg and “Uncle Ray”
In the car purchasing game, the final stage of negotiation takes place in the Financing Office. You no longer are sitting across from your dealer salesperson, but now must joust with the craftiest person in the dealership – the “closer” who will work feverishly to convert your good deal (for you) into a healthy win for the dealership.
By this point in the negotiations, you should have locked in your out-the-door price for the vehicle, along with a realistic trade-in value.
Don’t congratulate yourself too early on having made a shrewd deal; there are still two more hurdles to clear: financing; and various protection packages or extended warranties.
Let’s look at Financing.
Profit for the dealership is generated by marking up or receiving some sort of commission from the interest rate factored along with the duration of the loan. The more interest that you pay, over a longer period of time, is the profit derived.
It is essential that before walking into any dealership with the intent to buy, you need to visit your bank (or multiple banks) and get pre-approved for a car loan. True, you do not yet know the final out-the-door price of the vehicle that you are hoping to acquire, but you have a rough idea of the dollar range. Your banker can quote you a couple estimates to cover a realistic spread, based on your credit worthiness and other factors. You are not their first client; they know how to do this.
You should walk out with a good understanding of interest rate, and what kind of monthly payments to expect depending on down payment, trade-in, and length of loan.
The dealership Finance Officer will offer you financing terms as well, which you will compare to the numbers already in your hand.
Sometimes, the numbers from the dealership will beat your bank. Manufacturers often have their own subsidized banking arrangements, along with special dealer incentives, because they need to move inventory as part of their big corporate picture in which your individual loan is outweighed by complex industrial financial strategies and corporate spread sheets.
Dealer financing is not always a rip-off; often it can be a very good offer. But you won’t know unless you have something to judge it against. For example, Acme Bank Credit Union may have quoted you 3.99 APR on a 60 month loan, but Toyota might counter with 1.99 APR.
On the other hand, dealer financing might be a rip-off, so you do need to know what to expect.
The Finance Officer will run your credit application at this point. Do NOT fill out any credit application during the initial sales portions of your visit; you do not want the salespersons sizing you up while negotiating the OTD price.
The dealership will present you with an interest rate. The rate that they are going to quote you across the desk is called the buyer rate.
In automobile financing, the buyer rate is the interest rate you pay as the borrower, while the seller rate is the wholesale interest rate the lender offers to the dealership.
The difference between these two rates is a primary way car dealerships make a profit on financing.
Understanding the Two Rates
The Seller Rate (Buy Rate): This is the wholesale interest rate a bank or finance company offers to the dealership to fund your loan. It is based entirely on your credit score, financial history, and loan terms. The customer rarely sees this rate.
The Buyer Rate (Contract Rate): This is the retail interest rate presented to you in the final sales contract. It is the actual Annual Percentage Rate (APR) you will pay over the life of the loan.
How the Retail Markup Works
Dealerships act as middlemen between you and the lender. When a bank approves you for a specific seller rate, the dealership is usually allowed to mark up that interest rate before presenting it to you. This markup creates the buyer rate.
The Spread: The difference between the seller rate and the buyer rate is called the "spread" or "dealer reserve."
Dealer Profit: The lender pays this profit margin back to the dealership as a commission for securing the loan.
Legal Limits: In most places, legal and lender policies cap this markup at 2% to 2.5% above the seller rate.
Example
Imagine you apply for a car loan through a dealership's finance department:
The Evaluation: The bank reviews your credit and approves a wholesale seller rate of 5.0%.
The Markup: The dealership marks up the rate by 1.5%
The Contract: You are presented with a buyer rate of 6.5% on your final contract.
The Cost: That 1.5% difference goes directly to the dealership's profit margin, adding thousands of dollars to your total cost over a 60-month or 72-month loan.
The magician’s misdirection
The infamous four-square is a shell game. If the Finance Officer lets you dwell on the APR of the loan, it will invite doubt. So immediately the conversation will shift to the “monthly payment”. Then, with a blur of hands, the APR and the monthly estimates will be scratched over, replaced with new terms calculated by increasing the down payment and extending the life of the loan by an odd number. Rarely will they increase the loan duration by something as easy as 6 or 12 months, but it will be a number in between – so as not to register immediately in your mind. Round numbers readily translate into calendar years: 60 months is five years and 72 months is six years, but what is 68 months or 76 months.
By keeping you focused on the monthly payment, they can obscure the total amount of the loan including interest. Most people are mainly concerned with affording the monthly obligation, and don’t analyze the impact of a very lengthy loan duration. If your car depreciates faster than the loan balance, your purchase could be “under water” (negative equity). Not so much of a problem if you keep the car for a long time, but if you decide to sell it after a few years, you could have a problem. Something to think about. And why GAP insurance is important (but don’t get it through the dealer).
How to Protect Yourself
You do not have to accept the dealership's initial buyer rate. Because financing is a negotiable item, you can lower your costs by taking a few strategic steps:
Get Pre-Approved: Apply for a car loan at your local bank or credit union before visiting the dealership. This gives you a baseline retail rate to use as leverage.
Ask Direct Questions: Ask the dealer's finance manager, "Is this the buy rate from the lender, or has a dealer markup been added?"
Negotiate the APR: If the dealer's buyer rate is higher than your bank's pre-approval rate, ask them to match or beat it. Dealerships will often lower their markup to secure your business. There are lots of under the table incentives and kickbacks; sometimes it is not about the profit on your individual loan but the dealership surpassing an overall quota for the quarter or for the year.
Know the law. The bank does not require you to purchase any additional items or packages to secure your APR. Yes, if you increase the down payment or trade-in value, that increases the equity while lowering the total of the loan amount – which could result in better terms. But adding GAP insurance, extended warranties, protection packages from the dealer cannot be conditional to the loan being approved. The bank might like to know that there is GAP insurance in addition to regular car insurance, but that can be provided (at much better cost to you) from your auto insurance agency – not the dealership. So if the dealer tries to coerce you into purchasing various add-ons in order to get the financing APPROVED… get up and leave!
It’s not over, yet.
There is still one more round of money shuffling. You think that everything has been negotiated and agreed upon. Out-the-door pricing, down payment, trade-in, loan APR & duration, monthly payments. Not so fast!
The sales pitch is going to be that you need to protect your new investment. A list of add-ons will be presented, often showing three or more tiers of protection for each item. Of course, the cheapest tiers offer the least amount of protection, so your “friend” the Finance Officer will advise you to ignore those.
“The ultimate tier is probably way more than you will realistically ever use, so cross those out. The mid-tier makes the most sense!
“Don’t worry about the price! If you get all of these, it only adds a few dollars to your monthly payment; less than a few trips to Starbucks. Isn’t it worth ten or fifteen dollars a month to know your investment is protected?”
Quick, pull out your phone calculator and do the math! Fifteen a month, for how many months (60, 72, 84, ??), works out to how much? And remember that you are paying INTEREST over all those months in addition to the base price of the add-ons.
Make them break down the actual OTD cash price to you of each add-on, so you can compare it to the total amount you will have paid over the life of the loan. That $750 package might end up costing you, over 84 months, a hell of a lot more.
Most of the add-ons are unnecessary, such as nitrogen fill for your tires. Plain air is already 78% nitrogen. If you offroad, you will be airing down and airing up on a regular basic anyway, negating that initial nitrogen fillup.
Interior protection packages are rarely much more than Scotchgard or similar. Exterior paint protection is just a spray of clear-coat (do it yourself or have a detailer do it). Save cash and skip the dealer.
VIN etching, LoJack, and other anti-theft stuff doesn’t make much of a difference. Your car will probably be stripped and thrashed after thieves take it. Your vehicle already has various GPS tracking built-in. But if you do want enhanced theft protection, just buy it from vendors and SAVE a ton of money.
Most dealership extended warranties are overpriced compared to what you could find on your own. Also, some manufacturers allow you to purchase warranties up to 36 months from time of vehicle purchase, so do not allow yourself to be pressured.
Extended service or maintenance contracts may be a worthwhile addition, depending on what is included. Always do the math. How much do oil changes actually cost if you get them from a reputable repair shop? Are the 30k and 60k services covered? We have purchased service contracts for our cars and did end up saving a lot of money, plus it encouraged us to bring the cars in regularly. Each deal is different, so run the numbers.
Proof-read before you sign
Before signing the final sales contract, read every line carefully! Compare each line item to your signed OTD quote. Demand an explanation of everything, and do not settle for lumped or summary sub-sections. Break it all down!
It is not unusual, especially if you sign papers late in the day after normal banking hours, or over a weekend or holiday — they might mention that the contract is contingent on additional banking or financing approval, insist that they do NOT touch your trade-in until everything is finalized. Get that in writing! Make sure that the contract guarantees you the ability to return the new car and immediately be reimbursed for the down payment along with the return of your trade-in (unless you don’t need that car). Getting cash back for your trade-in doesn’t help you if it is your only source of transportation.
If you can, just tell them that you will leave the new car and just come back after all is approved in a day or two. You should keep the trade-in for now, as well.
A known dealer trick is to get you to drive off in your new purchase, and become emotionally or logistically attached to it, only to call you in a few days in order to re-negotiate the original deal on account of the bank failing to approve it. They are betting that you are willing to pay a little more rather than give up your new car and walk away (often with cash instead of your original trade-in).
