Buying a car is a huge financial investment. For most people, it requires taking out a loan in order to afford those payments. You may assume that one loan is much the same as another: after all, you're going to be paying on the vehicle for years regardless, and monthly payments may appear similar no matter where you go. However, you may find that dealership financing and credit union auto loans have very different rates and terms and choosing the right one for your loan can make a big difference in how much you ultimately end up paying on your loan.
How Dealership Markup Works on Interest Rates (And How to Avoid It)
One-stop vehicle shopping looks convenient on the surface. The dealership approves your loan, you can see immediately how much you're approved for, and you can find a vehicle that matches your needs. However, dealerships charge a premium for that convenience. When you secure a loan through the dealership, they add a hidden percentage generally between 1% and 2.5% to the interest rate. The dealership then keeps the difference between the loan rate offered by the bank that provides the financing and the rate they passed on to you as the consumer. In many cases, this can mean significantly higher cost over time.
Avoiding the dealership markup on interest rates is simple: don't secure your loan through the dealership. Instead, choose a credit union like us at HEFCU for your auto loan needs.
The "Cash Buyer" Negotiating Power
When you walk in to buy your vehicle with a preapproved loan from HEFCU, you may discover that it offers more advantages than you think. Negotiating as a cash buyer lets the dealership know that you're serious. They get their money up front, which means they may be willing to negotiate down to a lower price. However, negotiating as a cash buyer also means you have a strict budget, so the dealership will need to fall in line with your needs. In many cases, that can mean you walk away with a lower purchase price, lower interest rate, and higher savings.
Why the Total Cost of the Loan Matters
Many people focus on the cost of monthly payments when they're making a new vehicle purchase. Your monthly budget relies on that payment amount fitting in, and considering the total cost of the vehicle can feel daunting, especially when you know you're going to be making payments long-term. However, even a minor change in the loan, such as the higher interest rate a dealership loan may add, can mean a much higher final cost of the vehicle, whether that means increased up-front payments or a longer loan term.
Suppose, for example, that you have a five-year loan on a $25,000 vehicle. If your interest rate is 5%, you may end up paying around $472 per month. Increase that to 7%, on the other hand, and your payment is around $495 per month. Over the 60 months of the loan, you could end up paying an additional $1,360.
Refinancing When You've Already Made the Dealership Loan Mistake
If you fell into the dealership loan trap before you realized the damage it can do, you aren't alone! Fortunately, you can refinance your loan and avoid future unnecessary dealership fees. First, check your loan for any prepayment penalties: some lenders will stack on the fees. Next, bring your current loan to HEFCU. We'll let you know what you're approved for and, when approved, pay off the old loan. You'll then begin making your monthly payments to us, often at a much lower rate.
Get the Auto Financing You Need
Whether you're looking for a new vehicle and need financing assistance or you need to revisit your current auto loan arrangement, HEFCU has options that can help get you on the road. Contact us to learn more about our auto loan financing.
Image credit: // Shutterstock // Garun .Prdt
