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What Are the Risks of Financing at the Dealership?

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The WSVN 7News show Help Me Howard recently featured a cautionary tale on the risks of financing through a dealership. A consumer headed to a South Florida dealership to find a car after starting a new job. He was given the green light for financing approval, made his down payment and drove off with a 2015 Lexus IS250. This should have been a time for excitement and celebration.

However, he heard back from the dealership two weeks later with some bad news. The loan hadn’t gone through as planned. He was given a choice: bring more money or the dealership would repossess the car.

Initially the dealership refused to even return his down payment. However, after help from the show's host he was finally able to get part of his money back, but still lost out on the car. To avoid finding yourself in this dissapointing situation, it’s important to understand the risks of financing at the dealership.

Pending financing

While the dealer in the story mentioned above showed bad character by making it difficult for the buyer to get his down payment back, it didn’t break any laws. When a consumer purchases a car at a dealership, they often sign a contract that specifies the financing is still subject to approval. This practice is known as spot delivery or yo-yo financing.

The buyer often believes they have received a final approval on financing before driving away. However, the truth is that the dealership has the right to take the vehicle back or change the terms of the agreement.

Selective loan preference

Spot delivery isn’t the only thing to watch out for. When you apply for financing at the dealership, the dealer acts as a middleman. Their financing department submits your information to different financial institutions to find a loan.

However, this process lacks transparency. You should know that obtaining financing on your behalf is one of the methods dealerships use to increase their revenues.

Dealers earn a commission known as a finance reserve. The dealer can add between 1 and 3 percentage points to the rate the lender offers, then pocket the difference. The average monthly auto loan payment is nearly $600, so many buyers find themselves overpaying for financing.

Because the loan you eventually go with can impact how much the dealership earns, selective loan preference is a common practice. If a dealer knows they will earn less with a specific lender, they won’t send them your information.

Pressure to make an immediate decision

Dealers understand that it’s not in their best interest to have you shop around and compare financing options.

One of their techniques is to say you need to make a decision right away or risk losing out on the vehicle you want. They might also claim that they can’t guarantee you the same interest rate if you wait. These practices could explain why satisfaction tends to be higher among consumers who buy a vehicle online than among those who visit a dealership in person.

Get pre-approved instead 

There are alternatives to getting financing at the dealership. You can reach out to your local modern financial institution and get pre-approved for financing before you shop for a car.

Getting pre-approved means you can take the time to review the terms of the loan without a salesperson pressuring you. It also protects you from questionable practices like spot delivery or selective loan preference.

Are you thinking about purchasing a vehicle? With great rates, low to no fees and a convenient application process, Power Financial Credit Union makes it easy to get affordable financing. Start your pre-approval process now!