Buying A Car Today? Go Prepared, Or Prepare To Spend Extra: UPDATED

November 29, 2013

UPDATE: See below

In America, auto sales are going strong, and as we mentioned earlier, they're poised to get even stronger this weekend. But if you're one of the many folks planning to purchase a new vehicle today -- or any day -- spend some time preparing for your shopping excursion. As the New York Times points out, failing to do so can cost you big bucks down the line.


If you're like most new-car shoppers, you plan to take out a loan to pay for your next ride. Chances are good that you'll rely on the dealership to arrange that loan -- after all, they're always promising super-low interest rates in their TV and print ads, so why would you look anywhere else?

The answer is simple: dealerships aren't banks. They're brokers, and like all brokers, they make their moolah by tacking on fees of their own. 

Those fees usually comes in the form of added percentage points on your loan. The National Automobile Dealers Association insists that the average fee typically amounts to one point or less -- in other words, if a lender approved you for a loan at five percent, the dealership would tell you that the rate was actually six percent, pocketing the one-percent difference.

That difference can add up to a thousand dollars or more for the dealership. And really, all they've done is made a call on your behalf. 

Worse: there's no requirement that dealerships disclose how much they increase loan rates. And some consumer groups insist that the average mark-up is upwards of two percent. All the fine-print-reading in the world won't reveal that.

For years, advocates have argued for a change in the system -- a shift from percentage mark-ups to flat fees. Dealers have fought such changes tooth and nail, insisting, as you might expect, that such fees would end up costing consumers more.

At long last, though, watchdog groups are making progress thanks to several auto shoppers who claim that dealers targeted them with higher mark-ups because of the shoppers' race. Unfortunately, it'll be a long time before any resolution is reached.


There's a very simple solution to the problem of interest rate mark-ups, though: secure your loan before you head to the dealership

Start by calling a bank where you already do business -- either personally or on behalf of your company. Tell them you have an account and that you'd like to secure an auto loan. They'll take it from there.

On the off-chance that doesn't pan out, try a service like LendingTree. It's quick and easy, and you'll receive a handful of competing bids for your loan within a few hours. (You'll also receive a bit of email spam, but it's nothing that a good email filter can't sort out.)

True, LendingTree is a broker just like your local dealership, and loan rates that come through LendingTree could be slightly higher than if you went directly to the bank. The workaround? Find a decent offer on LendingTree, then contact the lender directly to see if you can negotiate a lower rate. 

And if you've already taken the plunge and landed in a high-interest loan, don't worry: many banks will refinance auto loans nowadays.

Got any other tips or tricks for simplifying the auto loan process? Feel free to share them in the comments below.

UPDATE: Charles Cyrill, director of public relations for NADA, sent us the following statement after this article was posted:

Dealers have access to wholesale financing rates, also known as the buy rate, through many lenders. The wholesale/buy rate is not available to consumers, just like other products. The typical wholesale-retail transaction exists in every consumer auto loan, whether you receive financing from a bank, credit union or at a dealership. Banks and credit unions do not loan money at their wholesale/buy rate. They loan money at the retail rate or APR. Car buyers should compare the APR at banks and credit unions, and then see if their dealer can “meet or beat” those terms.


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