Behind the Wheel: Do Car Dealers Really Get Kickbacks for Financing?
You’ve found your dream car, you’re ready to drive it off the lot, but then comes the dreaded financing conversation. As you compare interest rates and loan terms, a nagging question might pop into your head: “Do dealers get something out of this?” Specifically, are they getting kickbacks for steering you towards certain lenders?
The short answer is yes, sometimes. Dealerships can make money through what’s called dealer reserve, which is essentially a markup on the interest rate offered to you by the lender. It works like this:
Let’s say a lender offers you a loan at 4% interest. The dealership might add a percentage point or two to that rate, bumping it up to 5% or 6%. They then keep the difference between your rate and the original rate offered by the lender as their profit.
Sounds sneaky, right? While it’s not illegal, it’s definitely something you should be aware of when negotiating financing at a dealership.
Here’s why dealerships might participate in dealer reserve:
* Extra Income: It’s an additional stream of revenue for the dealership beyond just selling the car itself. This can help them stay competitive and offer better prices on vehicles.
* Relationships with Lenders: Dealerships often have strong relationships with lenders, which allows them to negotiate favorable terms for their customers (including dealer reserve).
But don’t worry, there are ways to protect yourself:
1. Shop Around for Financing: Don’t just rely on the dealership’s financing offer. Get pre-approved for a loan from your bank or credit union before stepping foot in the dealership. This gives you leverage and a baseline interest rate to compare against.
2. Negotiate the Interest Rate: Don’t be afraid to negotiate the interest rate offered by the dealership. Let them know that you have other financing options and see if they’re willing to lower their markup.
3. Read the Fine Print: Carefully review all loan documents before signing anything. Pay close attention to the interest rate, APR (Annual Percentage Rate), and any fees associated with the loan.
4. Consider Direct Lending: Some manufacturers offer financing directly through their own financial arms. This can sometimes result in more competitive rates and eliminate the potential for dealer reserve.
Transparency is Key
While dealer reserve is a common practice, reputable dealerships will be transparent about it. They should clearly explain how the interest rate is determined and be open to discussing alternative options. If you feel pressured or uncomfortable with the financing process, don’t hesitate to walk away.
Remember, knowledge is power! Understanding how dealership financing works empowers you to make informed decisions and get the best possible deal on your next car purchase. Happy driving!
Leave a Reply