When you visit a dealership to buy a car, you may be offered financing options as part of the deal. At first glance, this may seem like a convenience for you, the buyer, but it's important to understand that dealerships benefit from offering car finance in multiple ways. While it may seem like they’re helping you out, the truth is, financing through a dealership can be a profitable venture for them.
💰 Profit from Markups and Interest Rates
🤑 One of the primary ways dealerships profit from offering car finance is through markup on the interest rates. The dealership typically works with a lender or bank to secure a loan for the customer, but the interest rate they offer may be higher than the rate the lender would provide directly. The dealership then keeps the difference between the two rates as commission. This means you could end up paying more for your car loan than you would by going directly through a lender.
🏦 Finance and Insurance (F&I) Departments
💼 Most dealerships have a dedicated Finance and Insurance (F&I) department that handles all financing, insurance, and warranty options. These departments often receive bonuses and commissions based on the number of finance deals they close, which incentivizes them to push loan offers to buyers, whether they need it or not. While this service can be convenient, the focus is often on increasing the dealership's profits rather than securing the best deal for the customer.
🚗 Increase in Vehicle Sales
📈 Offering car finance also makes it easier for customers to purchase a vehicle they might not have been able to afford otherwise. With easy financing options, customers are more likely to commit to buying a car, which increases vehicle sales for the dealership. By offering financing, the dealership expands the pool of customers who can buy, making more sales than they would if they only offered cars for cash purchases.
🛠️ Incentives from Lenders
💸 Dealerships may also receive incentives from lenders for offering their finance products. These incentives could include bonus payments for each loan closed or specific rebates for offering a particular lender's finance options. This can further motivate dealerships to push their financing options over others.
🤔 Why Finance Through a Broker Instead?
While dealership financing may seem like a convenient option, it’s important to recognize that dealerships are in the business of making a profit. Their finance offers often come with higher rates and fees. In contrast, a finance broker works with a wide range of lenders to find you the best deal, ensuring you get competitive rates and better terms.
🧐 Finance brokers also take the time to understand your financial situation and present loan options that suit your needs, without the pressure that can often come with dealership financing. Brokers can help you avoid unnecessary markups, making sure you only pay for the car, not hidden finance charges.
🔑 Final Thoughts
🚙 While dealerships may offer convenient financing options, they benefit in several ways, from higher interest rates to sales incentives. If you want to ensure you’re getting the best deal and avoid unnecessary charges, consider working with a finance broker who can help you navigate the complexities of car financing and secure a loan with better rates and terms.
DISCLAIMER
The information provided on this website is general in nature only and has been prepared without considering your financial needs, circumstances and objectives and should NOT be construed as financial, taxation or legal advice. For more information, get in touch with our experienced partner brokers today.
