| Many people are under the assumption that car | | | | your loan at an interest rate of 10%. That is a |
| dealers only make money on the sale price of a | | | | reasonable auto loan rate for someone that has had |
| vehicle. If this were true, it would make buying a car | | | | some bumps in the road on their credit report. If the |
| much simpler and getting a better auto loan rate a lot | | | | approval comes back allowing the dealer a dealer |
| easier. It's not the case however, and very few people | | | | add-on rate, of 3%, then the dealer can add 1%, 2% or |
| that are outside of the car business or have never | | | | 3% to your auto loan rate. The difference between |
| worked in that industry are aware of exactly how it | | | | paying 10% or 13% on your car loan, can make a |
| works. The fact is that the sale price of the vehicle | | | | substantial difference in the amount of your car |
| only amounts to a small part of the total picture. | | | | payment. In many cases, this can add $100 or more to |
| When you go into a bad credit car dealership to buy a | | | | your monthly car payment. The additional amount that |
| car, the sale price primarily covers the cost of the car, | | | | you pay each month because of the dealer add-on |
| the cost of dealership overhead and the salespersons | | | | rate, is divided between the car dealership and the |
| commission. That is called front end profit. Where the | | | | finance company. |
| real money is made, is in what is called back end profit. | | | | So what happens if you trade your car before your |
| When a dealership takes your credit application and | | | | car is paid off? Generally a dealership is only charged |
| sends it to a few lenders, the lenders send a response | | | | back if you trade your vehicle within the first year. |
| that either approves or denies your application. If your | | | | That is why the dealership is not advanced the full |
| application is denied there is generally a good clear | | | | amount of the extra profit that is made on the dealer |
| answer as to why, which helps the dealer to know in | | | | add-on rate. |
| the future what to look for prior to submitting | | | | How can you avoid this? |
| applications to that particular company. If your | | | | With the veil of secrecy being held closed so tight in |
| application is approved, there is a few different factors | | | | car dealerships, regarding this issue, the public really |
| that are involved. There is be amount allowed for | | | | has no way of even knowing what their true interest |
| financing, a percentage of that amount that the | | | | rate is when they are approved. The only way to |
| creditor will allow for an extended warranty, and the | | | | avoid this is to seek financing outside of a car |
| number of percentage points that the dealer can add | | | | dealership and even then similar principles operate with |
| to the loan. These percentage points, otherwise known | | | | bank loan officers. One of the best ways of avoiding |
| as dealer add-on rate, are where a lot of hidden | | | | this is comparing auto loan rate quotes from multiple |
| money is made in car dealerships. To elaborate on this, | | | | companies, or using a service that uses the best rate |
| let's have a simple example. | | | | for you. |
| Let's say that the creditor or loan company, approves | | | | |