What Is Auto Dealer Financing?

Auto dealer financing occurs when an automobile dealership arranges the financing for a vehicle you purchase. It offers convenience to the customer, as you do not have to go somewhere else to arrange the financing on your purchase. As with any business transaction, you must prepare yourself to get the best possible deal when financing a new vehicle.

Background

With auto dealer financing, you complete a credit application with the dealership, and it arranges for the financing. While it may look like the dealership sends the credit application to several banks to see which one will approve the loan at the best rates, that generally doesn't happen. In most cases, the dealership's finance manager already knows the criteria that the banks use to make a loan, and he knows from your credit and other information if you will be approved and at what terms.

Selling the Contract

The financing transaction that you sign for at the dealership is usually between you and the dealership. You sign a contract saying you will pay the dealer a certain amount per month over a certain length of time at a specified interest rate. This contract also says that the dealership can sell the contract to another party. And this is usually what the dealership does, sometimes days after you have taken delivery of the vehicle.

Discount and Buy Rates

The dealership receives wholesale interest rates from financial institutions. This is typically called a discount rate, and may be considerably lower than what you end up paying. The dealership may write your contract at a higher rate, or the buy rate, and the financial institution will usually buy the contract from the dealership, paying it a premium for the higher rate. Usually, this is a cash payment to the dealership.

Other Considerations

The key to successful vehicle financing is to know your credit rating, and what type of rate you would be offered on your own at a bank. If the dealership's rate comes in close to that, you are getting a fair deal. Also, if you have credit challenges, the dealership may have access to different lenders who may be more willing to provide financing for you.