Dealers often make less profit in car sales because of the widespread availability of invoice pricing and incentive information, but they make up for some of this by getting money from things, such as financing, insurance and warranties, according to Cars.com writer Joe Wiesenfelder. The amount a dealer makes on car loans depends on various factors.
Process
Most dealers do not directly finance their customers' vehicles. They act as middlemen, shopping around with various banks and finance companies, communicating the results and handling the loan paperwork. This process allows them to add additional points to the interest rate. The dealer can retain the entire additional amount as profit or share it with the lender, and the law does not require disclosure to you. There is no standard added amount, but "The Wall Street Journal's" Smart Money column explains that it is common to add two percentage points.
Prevention
Save money by arranging your own financing before you start car shopping. Start with the bank or credit union where you currently have your accounts and check out loan shopping websites. You save money with a pre-approved loan direct from the lender because no one is boosting the interest rate to get extra profit.
Warning
Some car dealers are especially likely to wring profit out of vehicle buyers with bad credit because they have fewer options. These sellers know you cannot readily get a loan on your own, which makes you more likely to accept the financing they offer, even if the rate is very high. "The Wall Street Journal" Smart Money column warns that some even claim the lender requires you to buy an extended service plan, even though that is untrue. You may be able to get pre-approved and avoid the hassle if you save up a large down payment and select a modestly-priced car. Otherwise, consider asking a family member or friend to co-sign the loan. You qualify based on the other person's good credit record, but he is equally responsible for the loan, so you destroy his credit rating if you default.
Considerations
Bad credit puts you in a difficult position for getting car loans, but you can offset some of this by repairing your credit before car shopping, according to Edmunds editor Warren Clarke. Order free credit report copies from TransUnion, Equifax and Experian through AnnualCreditReport.com, which provides one free copy from each bureau annually. Find mistakes that hurt your credit score, such as incorrectly dated delinquencies or inflated balances, and dispute them. According to the Federal Trade Commission, credit bureaus are obligated to research your claims and remove mistakes within a month. Start the loan-hunting process once the bad items are erased from your credit reports.
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