Most people save up some cash to buy a car in full or by getting a loan from a bank. However, most car dealers offer customers financing to buy a car through the dealership.
If you have spoken to a car dealer, you may wonder why car dealers want you to finance a car through them. We looked up the facts, and here is what we discovered!
Why Do Car Dealers Want You To Finance Through Them?
1. Higher Interest Rates
One of the main reasons why car dealers push people to finance a car through them is because there will be higher interest rates.
Generally, most loans are done because the loan financer can apply an interest rate, which is a percentage of the loan amount.
Normally, you can expect a significantly higher interest rate if you finance your car with a car dealer.
For instance, if a bank only charges you 2.5% for your car, a car dealer can charge up to 6% for your car financing.
Usually, a car dealer can earn up to 30% of their profits when they finance a car loan, thanks to the high interest rate.
So, why would anyone want to choose to finance from a car dealer if the interest rate is so high?
Other than not knowing that there are other options, some people may have no option but to get their financing from a car dealer.
For instance, some people with a bad credit score would not qualify for most bank loans since they do not have a reliable past regarding loans.
So, a person with a bad credit score that needs a car as soon as possible may have to deal with the higher interest rate from a car dealer.
Some dealerships may offer their car dealers enticing incentives to encourage them to have people finance car loans through car dealers.
For instance, some car dealerships offer “prizes” for reaching a certain number of sales, such as luxury vacations, expensive phones, etc.
That way, the car dealer is encouraged to offer more ways for customers to buy cars, including offering car dealership financing.
3. Potentially Faster Sale
Car dealer financing can be seen as a quicker way to buy or sell a car since it is seen as a “one-stop-shop” for buying a car.
Of course, every car dealer wants to sell a car quickly, leading them to offer customers financing through them instead.
4. Faster Full Payments
Most car dealers want their car deals to be fast while earning more money simultaneously, which can be achieved if you finance a car through the car dealer.
Usually, a car dealer will offer you a loan that would be paid within a few years or simply one year.
However, this is a lot shorter than some bank loans that would take more than a few years to complete.
While paying for a car fully in cash would be faster, that would eliminate the profits for the car dealer, as mentioned earlier.
The more sales you make as a car dealer, you will be seen as an excellent car dealer, which puts you in the running for a promotion.
However, not everyone is willing or can throw out a lot of money for a car right away, which is where a car dealer offers the option of car dealer financing.
Further, not all car dealerships offer promotions for their car dealers, which is where incentives or commissions will be given instead.
6. Ability To Decide The Interest Rate
As mentioned earlier, financing from a car dealership tends to be more expensive since the interest rates are higher.
Generally, a car dealership profits a lot because the car dealer can get the interest rate difference.
For instance, let’s say the bank says the loan is approved at a 5% interest rate for the car loan.
That allows the dealer to charge the borrower an 8% interest rate, so the car dealer can pocket the 3% interest rate difference.
7. Safety Net With Cosigning
Most people who opt for financing with a car dealership would have a bad credit score.
If their credit score is bad, most lenders don’t want to make deals with them, but a car dealer can make up for this risk by making you get a co-signer.
That said, a co-signer is a person who signs into the loan, pledging that they will take care of the loan payments if the original borrower defaults on their payments.
Typically, cosigners would have good credit scores to compensate for the borrower’s bad credit score.
Therefore, this gives the car dealership assurance that they will be able to get the car fully paid even if the borrower was risky.
As such, car dealers do not mind the risk of financing a person with a bad credit score since the co-signer would carry the burden if the borrower defaults.
Most car dealers want you to finance your car loan through them because they get a huge profit thanks to taking a difference in the interest rate, which is already high.
Additionally, most car dealers can feel secure by getting a co-signer to sign the loan and get lots of incentives from making the deal.