There’s nothing like a visit to the auto dealer. 

You feel an instant rush of excitement as you peruse those shiny new cars and the multiple options available. 

Zeroing in on a particular model, you decide which color goes best with your eyes.  Now you’re ready to get serious about arranging your purchase.

You confidently stride into the showroom, and you are quickly greeted by a salesperson.  After a test drive and discussions about car options, something strange starts to happen.  Beads of sweat form on your forehead.  Your hands begin to shake.  The salesperson who once looked friendly enough now appears to have grown fangs and horns.  Can this be real?  No, but the anxiety you feel is real.

Navigating automobile financing can be one of the biggest financial decisions of your life. But it doesn’t have to be stressful. 

Prepare yourself with answers to 5 basic questions about auto financing before you shop for a new car.

1. How do dealerships secure financing?

At some point in the car buying process, you’ll be introduced to the “F&I” person.  This person is responsible for setting up financing and insurance for dealer customers. They will share the details of your purchase and your credit history with different credit providers. These could include auto manufacturer financial departments, banks and credit unions. Each credit provider will quote an interest rate and any applicable fees.

Arranging to finance your car through the dealer can be enticingly convenient, but there are certain things you need to know.

• Car dealers have business arrangements with the lenders that often include incentives for the dealer as a “reward” for financing a loan through that lender.
• The dealer knows that lower payments and auto loan interest rates make you more likely to buy a car.  They also want to make a profit that can come from the vehicle sale, the financing, or other add-on products they offer.  They don’t arrange your financing solely to help you out.

For these reasons, it’s important that you don’t jump at the first financing offer you see.

2. Should I get pre-approved for an auto loan before shopping?  If I do, when should I tell the dealership I already have arranged an auto loan elsewhere?

It’s a good idea to get pre-approved for an auto loan before shopping.  Not only will you be armed with the knowledge of how much you can afford, but you’ll also be prepared to evaluate and compare any financing options presented to you by the dealer.

Unlike home shopping when being pre-approved for financing may help you in your purchase negotiations, you may want to keep your auto loan pre-approval a secret until the end of the transaction.

Let’s make this point clear.  Financing can be profitable for dealerships in many ways, such as marking up the interest on your loan.   If they know upfront that they won’t be earning a profit from financing, they’re more likely to push harder to find profit elsewhere.

Keep discussions about the financing for the last part of your transaction with the dealership, particularly if you think you may directly arrange a loan with a credit union or bank.  But don’t wait until this point in time to start thinking auto financing.  Before visiting the dealership, discuss your plans with a lender; including the type of vehicle you are planning to purchase. Discover the rates and payment terms they offer.

Getting pre-approved ahead of time helps you to learn the financing options available to you.  The dealer can still present their offers, leaving them thinking that there may still be profit in the financing.  You may strengthen your negotiating position on other parts of the transaction, like the price of the car or the value of the trade-in.  You will be prepared to compare payments and rates presented by the dealer and ready to select the best option
.

3. How do dealerships make money offering 0% financing?

You’ve seen the advertising for 0% financing over and over again from a variety of car manufacturers and dealers.  These offers have become incredibly popular for car buyers and dealers alike. But remember, if it were honestly a losing proposition for the manufacturer, they wouldn’t keep doing it.

First, 0% financing gets people on the lot and encourages them to think about buying a car. The manufacturer and the dealer both make money on each car sold, so the 0% financing trades some profit per car in the hopes that they’ll make up for it in the number of cars sold.

Second, not everyone will qualify for 0% financing. Since most people who get to the point of discussing financing have decided to purchase a car, they’ll settle for a non-zero rate when presented. And that rate may very well be higher than what could be arranged directly with another lender.

Finally, 0% financing is frequently offered as an option to receiving a rebate.  You have your choice:  take the 0% car loan or take the rebate and reduce the price of the car.  In these cases, you will often find you’re far better off taking the rebate and arranging other financing.  It pays to do this comparison.

Look at Genisys Credit Union’s Rate vs. Rebate Comparison to determine your best option.

4. What is GAP insurance, and is it right for me?

The term “GAP insurance” or “GAP coverage” will usually come up in a financing discussion.  Don’t gloss over this because you’re getting close to grabbing the keys. 

“GAP” or guaranteed asset protection insurance covers the difference between the total remaining balance of a loan and the value of the car.  Look at it as a complement to your comprehensive automobile insurance. 

Here’s an example of how GAP insurance could benefit you.  Suppose that your vehicle is stolen or damaged in an accident so badly that your insurer determines the cost of repairs would be more than the value of the vehicle.  In this case:

• Your comprehensive insurance coverage will only pay out the value of the car, leaving you on the hook for any remaining balance and finance charges on your loan. The loan balance could exceed the insurance payout as your vehicle has lost that “new car value” as soon as you started driving it, especially if you did not make a down payment.

• If you have GAP insurance, the remaining amount you owe on the loan will be covered by that policy.

If you are buying a car without putting a lot of money down, or if your financial resources or credit history are limited, consider getting GAP insurance. It usually can be added onto to your loan.  But, like any other purchase, you should shop around.

Remember, this is another opportunity for the auto dealer to make more money from your purchase.  Many people just accept this as an add-on, but you may be able to find better rates on GAP insurance from a broker or another lending institution.

Genisys members frequently add GAP policies to their car loans at prices significantly lower than offered elsewhere. 

Learn more about GAP insurance at Genisys Credit Union.

5. What steps can I take to avoid being railroaded by last-minute financing changes?

Financing can be one of the easiest places for dealers to make money.  It’s almost always the last step in the car-buying process.  You’re nearly 100% committed to purchasing a car, and you are utterly exhausted from making a series of decisions.

Even if you’ve finalized the price and the plates are being removed from your old car, this is probably the best time to walk away and get a second opinion on financing. Ask the dealer to commit to a price on an offer sheet.  Tell them you need a little time to think about it.

If you’ve been pre-approved for a loan, take the time to compare the payments, terms, and, most importantly, the total cost of financing.  Call to review the terms and process for the particular car you have now selected. 

If you decide to get the loan through your credit union or another lender, your next trip to the auto dealer will be with a cashier’s check in hand.  The sales manager may hem and haw a bit. But, at the end of the day, they’d rather make the sale than make a little extra on financing.

© Genisys Credit Union and www.genisyscu.org, 2018.  Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content