Danny Chandler, a business manager at Roger Dean Chevrolet in West Palm Beach, says more and more customers are finding it makes sense to make a deal with the car dealer.
Chandler tells about one woman who wanted to buy a small truck for her husband. On a new job for only three months and saddled with a home mortgage and a car payment, she had only $100 to make the deal.
"The bank never would have made her a loan without more money down," he says.
But Chandler says he was able to find the woman a bank loan because Roger Dean places $500,000 in car loans each month with a number of lenders.
"We had the clout to make the deal," he says, adding that a credit check showed she was a good risk because her bills were always paid on time.
Conventional wisdom may not be best
Conventional wisdom says the best place to make a car loan is through the customer's bank or credit union. But as many car buyers have learned, the dealer often can find a lower interest rate or financing for buyers with special problems.
"On a theoretical basis, the car buyer should be able to make a better deal with the bank," says Fritz Elmendorf, spokesman for
Consumer Bankers Association. "But unless the car buyer has perfect or near-perfect credit, the dealer is in a better position to negotiate a lower interest rate because the bank wants the dealer's car loan business."
In effect, the dealer has turned himself into a middleman receiving some profit from placing the loan, says Art Spinella, vice president of CNW Marketing Research in Bandon, Ore., which specializes in consumer financing issues.
To do this, the dealer may shop the buyer's loan application with as many as 30 different lenders. To get the dealer's business, the bank may offer up to 1.5 percent off the interest rate it would offer the buyer if he came to the same bank, Spinella adds.
Dealer can get better deal from bank
On a four-year loan offered to the car buyer at 7.75 percent, the dealer may be able to get the same loan for 6.25 percent. The dealer's profit depends on how much of that interest rate cut he is willing to give up to sell the car, Spinella says.
To move cars in a glutted market, manufacturers may offer a low interest rate through their own finance companies such as Ford Credit or GMAC, says Roger Dean's Chandler. It is available to all buyers regardless of credit history provided they qualify for a loan, he says.
The result is that "it doesn't make sense to go to the bank if the manufacturer is offering special rates through its captive finance company, because the banks can't beat it," says Joseph Moran, senior vice president of Detroit-based
Comerica Bank's national dealer service division. The company provides financing only to auto dealers.
Moran pointed out that rebates are running up to $3,000 on some 1998 model cars. A study conducted by Comerica found some manufacturers are offering interest rates as low as 1.9 percent on a 24-month loan and 5.9 percent on five-year loans at a time when most banks are charging 8 percent for similar loans.
Buyers' desires give dealer the edge
It is also the buyer's desire for one-stop-shopping for the car, the loan and extras that has given the dealer an edge over the bank, says Richard Schliesmann, an executive vice president of Wells Fargo Bank NA and chairman of its auto finance committee.
In most cases, "the dealer's rates are competitive to the bank, anyway, so why not?" Schliesmann says, explaining it's no different than using a broker to find the best deal on a house.
"The dealer does all the work and the car buyer benefits from the result," says Schliesmann, who points out that most auto loans can be prepaid without penalty. However, he suggests checking the loan contract before signing on the dotted line.
Sometimes the dealer offers cash-back as an alternative to a low-interest car loan. "The customer has to put pencil to paper to see which will save the most money," says Comerica's Moran, adding the dealer's finance specialist will help the customer run the numbers.
Assuming the deal requires a minimum of $3,000 down, and the buyer has no trade in, "it may be better to take the cash and apply it to the down payment," Spinella says. "But if monthly payment is critical, and the buyer's trade-in is worth some money, it might be better to take the low annualized percentage rate. It will save the customer more money in the long run."
Try bank pre-approval first
To improve the buyer's chances of making the best deal, Spinella says it is wise to go through a bank's pre-approval loan process. "The car buyer can use the bank's interest rate offer to bargain a better one from the dealer," he says.
But what if the buyer can't meet the bank's criteria?
"Then no one can help him but the dealer," Spinella says.
Such was the case of a 21-year-old woman who had been working nine months in a minimum-wage job at a convenience market near where Spinella lives. With the help of a car dealer, she was able to purchase a $23,000 truck.
"The dealer found someone willing to carry the loan even though her credit didn't justify the risk," he says.
Bottom line, Spinella says, the dealer can usually find a lender because he wants to make the sale.