Getting a car loan doesn't have to be a nightmare, even with bad credit.

USA Today: Auto Loan FIRST, Dealership SECOND

last updated January 22, 2014 by

Even the USA Today, one of the premier newspapers in the United States, is coming around to the logic behind online car loans.  2014 is primed to be a year of historically low interest rates, but those interest rates will only be possible for loans that originate in low-cost lending agencies that do most (or all) of their business over the internet.  According to the USA Today, many dealerships charge interest rates that are 2-3% higher than their counterparts in the lending industry.

Why are Dealership Loans so Expensive?

There are two main reasons that car loans originated through dealerships are so expensive.  For one, dealerships have to charge more for identical services because they have so much overhead.  Dealerships have to pay salespeople, managers, administrative workers, loan officers, and they have to provide expensive office space and showroom area that costs them millions per year.  Online loan originators only have a small fraction of those overhead expenses, and they are able to pass savings on to consumers by reducing their interest rates and their loan fees.

Secondly, dealership loans are expensive because car salesmen know that people who come to the dealership without financing already set up probably think that the dealership is their only option for car financing.  Once someone has picked out a car, test driven it, and begun to negotiate its price, dealerships almost trap them in in-house financing.  This maximizes the profits of the dealership, but it takes away from the freedom of choice for the consumers.  Many federal agencies are currently looking into collusion between dealers and lenders, with evidence mounting that dealerships engage in manipulation of interest rates and financing deals to intentionally overload buyers with bad loans and high interest rates.

Do your Homework!

One of the best things that you can do as a car buyer is to educate yourself on the different interest rates that are out there.  Apply for loans with your bank, credit union, and with online auto lenders so you get the full spread of loan interest rates, and ensure that you are getting a good deal by setting up a substantial pool of loans with which to make comparisons.

Another benefit of using an online auto lender is the ability to get prequalified for a car of a certain value.  Prequalification tells dealerships that you are serious about purchasing a car, and it also reduces the pressure that they will put on you to make bad financing decisions.  For example, if a dealership knows that you’ve been prequalified for a certain loan amount, they won’t waste your time haggling monthly payments and interest rates, instead they will skip straight to marking down the total purchase price of the car.

Separating Loans from Car Dealerships

You wouldn’t take out a credit card at your grocery store, so why would you finance a loan through your car dealership?  Car dealerships are out to make a profit, and allowing them to control the financing process is just giving them another tool in their arsenal of tricks to cost you money.  When dealers control your financing, they are able to obfuscate the terms of your loan in a way that makes the total cost of your car confusing and deceptive.  Just say no to complicated dealership games and use a trusted auto lender for your car loan.