Car Loans at the Dealership

A great deal of car buyers still obtain their car loans from the car dealership where they purchase their new car.  Unfortunately, most consumers do not pay enough attention to the car financing department and how the process of obtaining the car loan works.  Most dealerships have a department called the finance and insurance department or F and I department that handles the car loans for their customers.  These departments are set up for dealers to offer one stop shopping for the financing needs of their customers.  The car loans that are originated from the dealer financing department or F and I department are not charitable work or designed to merely sell more cars.  The car loans are originated with a profit motive and can be a very lucrative business.

The first step in the process of working with the car dealers car finance department is the potential buyer will be asked to complete a credit application.  The credit application is a necessary step by all auto lenders to acquire the preliminary information about the car loan applicant such as their name, address, social security number, income, debts and place of employment.

With the car loan application and a credit release agreement from the car buyer, the finance and insurance department of the dealership will obtain a copy of the applicant’s credit report.  The credit report contains information about the individual car loan applicant’s credit history with records on individual open and closed credit accounts, including the type of account or loan, any late payments, amount of credit outstanding as well as any public records such as a bankruptcy or tax lien.  For each account, the credit report shows your account number, the type and terms of the account, the credit limit, the most recent balance and the most recent payment.  The credit report is the biggest determinant of the car loan approval and car loan interest rate.

Dealers sell or transfer their loans or loan contracts to other lenders, such as a bank, the manufacturer’s finance company or credit union.  When the finance and insurance department obtains the loan application and accesses the car buyer’s credit, they submit the credit application to one or more of these potential lenders to determine their willingness to purchase the car loan contract from the dealer.  Without the approval of one of these lenders the car dealership is not likely to approve the car loan.  The finance and insurance department is essentially a facilitator of credit and not the grantor of the credit.

The lenders and finance companies that the dealers work with assess the credit application and factors such as the car loan applicant’s credit score, income, debts, length of employment and even length of residence.  The basis of the evaluation is almost entirely statistical by measuring numbers such as the credit scores, debt ratios and length of employment.  The various lenders and finance companies utilized by the car dealer will make a determination on whether it is willing to buy the car loan contract based on the information obtained by the finance and insurance department of the dealership.

When the lender notifies the dealership of the car loan decision it will approve a loan amount as well as a wholesale interest rate at which the lender will buy the car loan contract from the dealer.  This interest rate is often called the “buy rate.”  The finance and insurance department will then set the term and interest rate on the car loan which will almost always be above the wholesale rate or buy rate the lender approves for the dealership.  This markup on the car loan rate allows the dealer to cover any costs associated with arranging the car loan as well as turn a profit when the spread between the wholesale rate and the car buyer car loan rate is sufficiently high enough.  A buyer can often negotiate the interest rate on the car loan and the terms for the monthly payment with the dealership, just as they would negotiate the price of the car itself.  The only way to negotiate is to know what a fair interest rate for an auto loan should be in the first place.

The general range of car loan interest rates set by the lender is determined by a number of factors.  The interest rate is often determined by conditions in the credit and interest rate markets such as the Prime Rate and Fed Funds Rate and the market to sell car loans in the secondary market.  The car buyer’s credit history will have the greatest influence on the car loan interest rate they receive.  The car buyer’s credit is the biggest factor along with their income and the buyer’s knowledge of the prevailing car loan rates.  Even a buyer with perfect credit may find the finance and insurance department of the dealership is either working with lenders who are not competitive on interest rates or the dealer is simply marking the wholesale rate up by a large percentage.  Either way, the only solution is to have knowledge in advance of what the average car loan rates that are available in your market.  It can not be emphasized enough how valuable car loan rate shopping and comparison shopping is before you agree to buy a particular car.

Tags: auto lenders, car loan interest rate, car loan rate, car loans

This entry was posted on Tuesday, May 19th, 2009 at 5:13 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.