Should You Get Dealer Financing?

If you have bad credit, dealer financing might be your best option for buying a car. But dealer financing is still notorious for inflating your costs.

Since the dawn of time, humankind has wondered: What is dealer financing? The car dealer was trying to sell them on the option after they selected one of those Flintstone cars where you use your feet to move it. (Which begs the question: Why have the car at all?)

Thankfully, car science has come a long way, and we now know what dealer financing is. But is it right for you? In order to explore the ins and outs of these mysteries, we have prepared an article to explain what dealer financing is, whether it’s a good option, and what alternatives exist.

This is that article. Prepare to begin reading it in three, two, one …

What is dealer financing?

The last time you passed by a car dealership, you may have noticed a giant “Buy Here, Pay Now” sign in between two of the wavy inflatable giants. This likely indicates that they offer dealer financing.

On a basic level, this is exactly what it sounds like. It means that you can get financing—namely secured personal loan to buy a car—at the dealership itself. The dealership may lend you the money directly, or it might work with third-party lenders to offer you a deal on the spot.

Much like a mortgage, this auto loan is paid off over time and your car serves as collateral. That means if you don’t pay, you’ll lose the car along with all of the money you’ve paid towards the principal and interest.

Is dealer financing a good choice?

Now you know what dealer financing is. Is it a good option to consider when you’re looking to buy a car?

“It’s an open secret in the automotive world that financing is where a dealership really makes its money,” explained Jake McKenzie, content manager at Auto Accessories Garage (@aagarage). “Some customers may think they just agreed to a great deal on their new car and so they let their guard down. What they fail to realize is that the financing portion of the deal is where car salesman really put their sales tricks into use.

“Most dealerships are staffed with salespeople who are experts in making bad financing options sound good, and in most cases, customers are out the door before they even fully grasp what they’ve signed on for.”

You should be somewhat suspect when it comes to dealer financing. Although they might care less about your credit score, the rates are likely to be much higher than the alternatives. If you are considering dealer financing, take McKenzie’s advice and don’t just accept the offer you’re given. If the dealer is working with an outside financer, then they’ve likely been given a quote known as the “buy rate.”

The dealer may very well be offering you a higher rate than the buy rate so that they can get additional money out of you that you wouldn’t pay if you were working with that lender directly. Ask the dealer what the buy rate is and don’t hesitate to try to negotiate the rates as low as you possibly can.

“Dealer financing is different from standard bank financing in that the dealer does the searching and uses their connections to get you financing,” warned Sean Pour, co-founder of SellMax (@sellmax). “But, typically this will be at a higher rate than if you were to go to your bank directly.”

Dealer financing alternatives.

As you may have realized from reading the previous section, dealer financing is rarely, if ever, going to be the ideal way to buy a car. Some would say it’s not even worth considering as an option.

“As a rule and without exception the best option for buying a new car is paying for it outright,” declared McKenzie. “However, paying in cash is just not realistic for most car buyers, so financing through a third party like a bank or credit union is the next best option. Financing with the dealership shouldn’t even be seen as a last resort, but as something to avoid altogether.”

Of the two experts that we talked to, the other didn’t go quite as far, but still viewed dealer financing as an absolute last resort.

“In terms of better alternatives,” began Pour, “yes, there are better alternatives. After witnessing thousands of deals, the ones who always got the best rate were individuals with good credit, who went directly with a bank they had a relationship with.

“But if your credit is a little shaky, then using the dealer to get your financing might be the only option because they have the know-how and connections to get it done when other conventional banks might say no.

“Other options include getting a co-signer on the loan. If you have a family member or relative who trusts you, if they have good credit, they can essentially promise the bank they will be responsible if you don’t pay and secure you a better interest rate with a conventional bank.”

You could also consider leasing a car until your credit improves, though you also may need a co-signer in that instance as well. Unfortunately, if you don’t have access to good public transportation, a car may be required for work and … everything else. Do your research to make sure you aren’t taken advantage of!

Cars and auto loans can be a real money suck. If you’re not careful, it could even be the thing that knocks your finances out of alignment, leaving you relying on short-term bad credit loans and no credit check loans (like payday loans, cash advances, and title loans) to make ends meet. To learn more about auto-related financial issues, check out these related posts and articles from OppLoans:

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Jake McKenzie is the Content Manager at Auto Accessories Garage (@aagarage), a fast-growing, family-owned online retailer of automotive parts and accessories. He manages all written content for the website including research guides, product descriptions, and other informative articles. He also enjoys attending the annual SEMA Show, the premier automotive specialty products trade event held every November in Las Vegas. Jake often lends his opinions and expertise to a variety of online blogs, websites, and news sources.
Sean Pour is the co-founder of SellMax (@sellmax), a used car buying company based out of San Diego, California. Sean has over ten years of experience dealing with the purchasing and selling of used vehicles. He graduated with a degree in computer science from San Diego State University.

The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.