Vehicle Loans
The dealership finance office is where a lot of car deals go wrong. Understanding what's being offered and what you can decline makes a significant difference in what you actually pay.
When you finance through a dealership, you're not necessarily getting a loan from the dealer. The dealer typically submits your application to multiple lenders and gets a rate back. They then have the option to mark up that rate before presenting it to you. The markup, sometimes called a dealer reserve, is how the finance department makes additional profit. In many cases, the markup is entirely legal and undisclosed.
Getting pre-approved through your own bank or credit union before you go to the dealership solves this problem. You walk in knowing what rate you already qualify for, and the dealer has to beat it or match it. Credit unions in particular often offer competitive auto loan rates to members, and they don't have the same incentive to mark up the rate.
Pre-approval also separates the financing conversation from the vehicle price negotiation. Dealers sometimes negotiate vehicle price, financing, and trade-in value simultaneously, which makes it easy to give ground in one area while taking it back in another. Handle them separately when you can.
Auto loan rates vary based on your credit score, the loan term, whether the car is new or used, and the vehicle's age. Used cars typically carry higher rates than new cars. Longer terms lower your monthly payment but increase total interest paid. A 72-month loan at 7% on a $30,000 vehicle costs about $5,700 in interest. A 48-month loan at the same rate costs about $3,700 on the same vehicle. The longer term saves $65 per month but costs $2,000 more overall.
GAP (Guaranteed Asset Protection) insurance covers the difference between what you owe on your loan and what your car is worth if it's totaled or stolen. Since new cars depreciate quickly, this gap can be significant in the early years of a loan. If you put little or nothing down, or if you rolled negative equity from a previous loan into the new one, GAP insurance is worth considering.
The issue isn't whether GAP insurance can be useful. It can be. The issue is where you buy it. Dealerships mark up GAP insurance significantly, sometimes selling for $800-1,200 what your insurer or credit union would sell for $200-400. If you want GAP coverage, buy it from your auto insurer after the purchase, not from the finance office at the time of signing.
The finance office typically presents a menu of add-on products. Most are overpriced and unnecessary for most buyers:
Dealer-offered extended warranties are expensive and often have exclusions that make them harder to use than expected. If you want an extended warranty, price it separately from a reputable third party after the sale. Never roll it into the loan, where you'll pay interest on it for years.
These products pay off your loan if you die or become disabled. They're almost always overpriced relative to standalone life and disability insurance you can get elsewhere. If you need this type of coverage, buy it through an insurance broker.
These add hundreds of dollars for services that often cost the dealer almost nothing to perform. Good wax and fabric protector from an auto parts store cost $30 and do the same job.
May be worth it if you drive in an area with a lot of road hazards. Otherwise, you're paying for coverage you'll likely never use. Check whether your auto insurer already covers road hazard damage to wheels.
The retail installment sale agreement is the document that governs your auto loan. Before you sign, confirm the interest rate, the APR, the total amount financed, the number and amount of payments, and whether there's a prepayment penalty. The total of payments tells you exactly what the vehicle will cost you in full. Compare that to the cash price to understand the true financing cost.
For more on loan add-ons, see the blog post on auto loan add-ons you should almost always decline. For the full picture on dealer financing costs, read about the hidden costs of auto dealer financing.