3 tips on getting a car loan at the dealer

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While consumers are now better protected than ever from unethical lending practices thanks to financial reform legislation that President Barack Obama recently signed into law, car buyers still need to be cautious when getting a car loan from an auto dealer.

Auto dealers, who act as middlemen for nearly 80 percent of all car loans, are exempt from oversight by the new Consumer Financial Protection Bureau, the cornerstone of the new law.

While dealers are regulated by the Federal Trade Commission and consumer protection agencies at the state level, many consumer advocacy groups have argued that this isn’t enough to stop the nation’s auto dealers from dubious lending tactics. In addition, dealers are also exempted from other federal laws, including the Truth in Lending Act, thanks to loopholes in those laws.

In fact, the Better Business Bureau receives more complaints about auto dealers than any other industry. What this means is car buyers should exercise caution when working with an auto dealer to help secure the car loan for their next vehicle. Here are three tips to ensure you are getting the best deal.

Get approved for a loan before visiting a dealer. Because a dealer is the middleman in the loan, the lenders it works with will quote them wholesale interest rates. Dealers are allowed to mark up those rates by up to 3 percentage points. Dealers generally don’t mark up a loan that much because the rate would no longer be competitive. But some dealers take advantage of car buyers who aren’t aware of what interest rate they qualify for by writing them a loan for a slightly higher rate.

To avoid this, get approved for your loan first. Shop around for the best rates online and via local lenders to see what’s the best rate you qualify for, then ask the dealer if he can beat it. If the automaker’s lending arm is offering zero percent or a low-interest rate, visit their website to get preapproved first, so you know if you qualify.

Don’t purchase any add-ons unless you really want them. Another way that dealers make money off a loan is by tacking on dealer options, such as VIN etching or extended warranties, sometimes without the buyer’s knowledge. Read your loan paperwork carefully to ensure that nothing extra has been added that you don’t want. If you do decide you want something extra, pay for it upfront to avoid the interest on the cost of that item.

Don’t sign any paperwork that says financing approval is a condition of the sale. We’ve all heard the stories of how a buyer drives away in his new car only to get a call from the dealership a few days later saying his car loan wasn’t approved at the current interest rate and that the sales contract needs to be rewritten at a higher rate. While these occurrences are unusual, they do happen, sometimes because of unethical dealer practices and sometimes because an overeager dealer thinks you’ll be approved for a rate that the lender turns down.

You can avoid this entirely by getting your car loan first, but if you decide to have the dealer facilitate the car loan, don’t sign a sales contract that says financing approval is a condition of the sale. Instead, ask the dealer to get finance approval from the lender first. It may mean a few extra days before you can drive home in your new wheels, especially if you are car shopping on the weekend, but when you do, you can be sure your loan is secure.

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If you have a car question, e-mail it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.

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