You've finished the bad coffee.
You've looked at everything remotely interesting in a car dealer's office.
And now the wait is over. The finance manager returns and is ready to tell you the interest rate on the auto loan for your new car.
Take it and you'll be paying too much.
Here's what was happening while you sipped coffee.
Calling the lenders
The finance manager faxed or e-mailed your credit information to more than a dozen different lenders to find out which ones would be willing to lend to someone with your credit rating on this particular day and at what rate. He chose a lender by looking at how big a cut he could make on the deal.
"They're going to choose whoever gives them the largest commission," says Art Spinella, vice president of CNW Marketing/Research in Bandon, Ore.
A dealer's cut usually means bumping up the interest rate on the loan. Will the best deal for a dealer be the best deal for a consumer?
"Of course not," Spinella says. "It usually isn't."
Dealers have been acting as middlemen in the auto financing business for decades.
"It's almost as old as the industry itself," says Mike Morrissey, a spokesman for the National Automobile Dealers Association.
Every dealer has relationships with dozens of different lenders including banks, credit unions and independent finance companies, as well as the financing arms of major manufacturers such as Ford Credit and General Motors Acceptance Corporation.
Some split the pot with the lender
In exchange for bringing customers to lenders, dealers dip into some of the profit by boosting interest rates. Some lenders set limits as to how much a dealer can boost the price of a loan. Others do not. Some lenders get a cut of the increased interest rates. Others do not.
"Some lenders will have a maximum. So you're only allowed to bump up the interest by two points," says Mark Eskeldson, an auto expert and author of
CarInfo.com, a consumer information and advocacy Web site.
"Some lenders have no limits. So a dealer could bump it up six to eight points."
And that can mean some serious profits for dealers and some serious losses for consumers.
"I've seen dealers who have $2,000 per unit profits in financing," Spinella says. "It's outrageous."
Credit union deals different
Keep in mind that every arrangement between a lender and a dealer is a little different. For example, a credit union may pay the dealer a $150 to $200 fee for every loan it receives. The interest rates on the loans stay put. So whether a person applies directly from a credit union or through the dealer, the rate will remain the same.
You won't see too many rate markups on discount financing deals from auto manufacturers either. If you qualify for that .9 percent financing offer, there's no way a dealer can bump it up. The dealer's cut is limited to a fee paid by the manufacturer's financing company.
Remember, only people with excellent credit qualify for super-low financing deals.
"If you don't qualify at .9, then you're thrown into the other pool and all bets are off," says George E. Hoffer, an economics professor at Virginia Commonwealth University. "It's buyer beware."
Markups on auto loans can happen to anybody who finances a car through the dealership.
"Good or bad credit doesn't matter," Eskeldson says. "Everyone needs to watch out."
Same credit rating, different deals
People with the exact same credit rating could walk away with drastically different financing deals.
It could be because the dealer is making a nice profit on a customer's trade-in and on the transaction price of the vehicle and is willing to give a little on the rate on the loan. It could be the dealer is especially keen to sell the vehicle being financed.
It could be because the consumer took the time to shop around for financing before setting foot in a car dealership.
"If a person comes in knowing what their financing alternatives are, the dealer has much less leeway," Hoffer says.
Shopping around for auto financing is easy to do. Check out the rates available from local banks and credit unions.
Bankrate.com lists national averages for new car loans as well as rates available in local markets around the country.
E-Loan are among the lenders offering online loans. The rates are in the 7 to 8 percent range for people with good credit. People with less than stellar credit may receive rates ranging from 13 to 20 percent.
"Online lenders are truly bargains," Eskeldson says. "They're cheap and they do less-than-perfect credit."
Get financing first
Arrive at the dealer with approved financing in hand. That way when a dealer tries to talk you into a marked-up interest rate on an auto loan you'll have the power to say "no."
"If you're smart and if you do your homework. They won't do it to you," Eskeldson says. "The only way car buyers can protect themselves is homework, homework, homework."
It's also a good idea to order a copy of your credit report and correct any errors a few months before shopping for a car. This step-by-step guide from
Bankrate.com will help you do just that.
"Two months before you buy a car, get a copy of your credit report and fix anything that's fixable," Eskeldson says. "It will save you money."