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Updated on Friday, March 26, 2021
Car dealers want you to finance through them because they often have the opportunity to make a profit by increasing the annual percentage rate (APR) on customers’ auto loans. But they also have relationships with multiple lenders and car manufacturers. One application at the dealership means you could receive many options, including manufacturer incentives. In other words, don’t count out the dealer — instead, use dealership financing to your advantage. Here’s how.
What is dealer financing?
When you submit an auto loan application form at a dealership, the dealer sends your application to finance companies it partners with, typically large lenders and local credit unions. The lenders send responses back to the dealership where a finance manager views them and presents an offer to you. The thing is, as the middleman, the dealer likely will show the best option for them, not you.
How dealers get paid by lenders
For example, Lender A offers a 4% APR and Lender B offers a 5% APR. These are the “buy rates,” the minimum APRs the lenders would charge you for the car you want. As a reward for sending them business, Lender A offers a small “flat” or finder’s fee to the dealer. But Lender B allows the dealer to increase the APR up to a 7% “contract rate.” That’s the rate the dealer presents to you. If you agree to the 7% APR contract rate, the 2 percentage point difference, or points, goes into the dealer’s pocket.
We explain flats and points in more detail below:
Flats: A flat fee given to a dealer, usually based on a tiered system. For example, if your auto loan is $10,000 or less, the lender might pay the dealer $50. If your loan is between $10,000 and $20,000, the lender might pay the dealer $100 and so on.
Points: The difference between the buy rate and contract rate. The buy rate is the minimum APR the lender will charge. The contract rate is the maximum APR the lender will allow the dealer to charge. The difference between the buy rate and the contract rate is the profit the dealer makes from marking up your APR.
How to know what auto loan terms you deserve
The best way to avoid a dealership markup is to get your own preapproved auto loan — ideally, more than one — from a few lenders of your choice before you go to the dealership.
An auto loan preapproval is typically a firm offer by a lender to a specific person (or people if you have a cosigner) for a certain amount of money. To apply, you should know roughly how much you want to borrow, for how long and whether you want a new or used car. You do not typically need to know the exact car or the exact amount. Auto loan preapprovals usually last 30 days. If you decide not to take the offer, you don’t have to do anything — it will expire on its own.
As low as
24 To 84
LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.
Advertised rate is for new and used auto loans for an offered loan amount of $10,000 with a 36 month term.
The lender performs a hard credit pull when you apply for a preapproval, just as it would when you officially apply for a loan. Once you decide on a vehicle, the final terms you receive from the lender should look the same or very similar to the preapproval, depending on the vehicle you choose. A prequalification only needs a soft pull and is thus considered a “soft offer”; the final auto loan terms could be very different once you do a full auto loan application.
How multiple applications affect your credit
If you do all applications within a 14-day window, applying to as many lenders as you want will not hurt your credit score any more than applying to one lender would. The credit bureaus give this window so consumers may comparison shop for loans without undue penalty.
Use dealer financing to your advantage
Dealerships won’t make any money off your preapproved auto loan and while it may feel nice to “stick it to the man” and not allow the dealership to run your credit, you could use the dealer’s desire to make money to your advantage.
Allow the dealer to send your auto loan application to its lender network and see what offers you get. If the dealer comes back with Lender B’s 7% APR from our earlier example, whip out the offer you have in your back pocket and say, “Lender C already approved me for a 5% APR loan. Can you beat that?”
Forced with the choice of making no profit versus a little profit, the dealer might then “suddenly discover” that Lender A offered you a 4% APR.
Here are the documents you’ll need to bring to the dealership to get the car-buying process underway.
Is it better to finance a car through a dealer or bank?
A reason you may not want to take a finance offer you get through a dealership, even if it is lower than your own preapproved offer, is if you have a lender preference. Maybe the lender with the lower APR offer has a reputation for bad customer service or doesn’t have local branches and you prefer to make your car payments in person. You might even prefer the convenience of having your auto loan at the same place where you bank.
Dealership financing vs. in-house financing
In-house financing at a dealership is when the dealer is also the lender. Financing a car this way is usually only offered to customers who cannot get a loan from other lenders due to bad credit or no credit and the APRs offered are often at the maximum allowed by state law. You could learn more on how to get an auto loan with bad credit or no credit.
7 steps for buying a car
It’s a best practice to get a car before you really need one. If you need to buy a car within a day, you’ll probably feel a lot of pressure and might take the first deal that comes along. Start the car buying process about a month before you know you’ll need one, if possible.
- Figure out how much car you can afford. Use an auto loan calculator first so you don’t spend hours researching a car only to find out it’s $100 a month too much. Cars are more expensive than their sticker price as you will have to add taxes, fees and auto insurance into your budget.
- Do your research. Before filling out any type of auto loan application, you should know in general what type of auto loan you want (used or new) and about how much you want to borrow for how long. If you’re having trouble deciding, these car-buying sites might help.
- Get preapproved. Potential lenders could include your credit union, bank or an online lender.
- Decide on a car and negotiate the price. The price for the car you want to buy shouldn’t be more than what industry guides such as NADA and Kelley Blue Book say it’s worth.
- Negotiate a trade-in price separately. If you have a trade-in vehicle, negotiate the price the same way you would for the new car you’re buying — the dealership should not pay you any less than what an industry guide says it’s worth.
- Talk finance after all prices are set. Allow the dealer to put your loan application out to their partner lenders. Ask the dealer to beat the loan offer you already received.
- Finish the paperwork. Follow through with any paperwork such as documents you may need to provide to the lender and the dealership finance manager.