how to finance a car

How to Finance a Car at the Dealership?

Chris Carter

Chris Carter

Curious about the process of financing a car at a dealership? Read more to find out about how this works and how to save time and money in the process. We explore the path of your information through the dealership, key steps along the way, and how to best use your credit score to your advantage when financing a vehicle at the dealership.

Pay For Your New Car With Someone Else’s Money

One question that often comes up when purchasing a vehicle at a dealership is how to pay for it. Let’s be honest: not many people have the option to pay for a car in cash and need to finance some or all of the purchase. The good news is that dealers know this, and go out of their way to make this process as easy as possible. The process of how to finance a car at the dealership is easy once you know the key steps!

Gone are the days when you have to pay cash for a vehicle. In fact, according to Experian.com, nearly 85% of new vehicles purchased in 2019 were financed. That is why is it so helpful to know how to finance a car at the dealership.

Financing a new vehicle has many advantages, such as:

  • Spreading out the large purchase into more manageable monthly payments
  • Get to enjoy your new car now, and pay for it over several years
  • Keep more cash in the bank to weather an unexpected event
  • Take advantage of low interest rates 
  • Keep your hard earned money working for you through investments

This guide will help illustrate how to finance a car at the dealership and offer helpful advice to ensure that you have the best possible experience. As always, please leave a comment below if you have any questions or comments about the financing process.

The Beginning: Agreeing to Purchase a Vehicle and Providing Your Information at the Dealership

Process of  how to finance a car

The first step to financing a vehicle: finding a vehicle to finance. We will assume that you have found the vehicle of your choice, negotiated to get the best possible price and terms, and are ready to move forward with the purchase process now that you understand how to finance a vehicle at the dealership.

Now, the salesperson will start the financing process. This involves taking a credit application, either electronically or with pen and paper. It is also common for the salesperson to make a copy of your driver’s license if they haven’t already.

Be prepared to provide information such as:  

  • your full name
  • current address
  • Social security number
  • Date of Birth
  • mortgage/rent payment
  • income information like gross pay

I would encourage you to provide as little information as possible until after agreeing on a bottom line purchase price. This means the price of the vehicle minus rebates and with all taxes and dealer fees added in. 

How the Dealership Arranges Financing?

The salesperson will now disappear for a brief time to go speak with a sales manager. At this point the sales manager will “pull” your credit, which basically means that the dealership obtains your credit score and a copy of your credit report. This allows the dealership to learn more about your financial background and which lenders might be best suited to finance your new vehicle. Don’t stress here – remember you know how to finance a car at the dealership!

Next, the sales manager will “submit” you to one or more lenders for financing. This is the official step in the application process where each lender will approve or deny your loan application.  The sales manager will submit a lot of information to the lenders, both about you and the vehicle you are purchasing. Some items that will be included are your personal information, information about your trade in (if applicable), and information about the vehicle you are purchasing, such as the purchase price and what the vehicle is worth. 

The next step depends on your credit history.

If you have a good/great credit history:

This process is fairly straightforward and quick, with the dealership shopping for the lowest rate to present you with. The dealership will normally submit to up to three lenders and leverage each of them against each other to find the best rate for you. Be sure to go into the dealership with an idea of what rate you could get from your preferred bank/credit union so that you ensure you receive a competitive offer.

If you have a marginal credit history:

This part of the process can take a little longer, as each lender will have a credit analyst really dive into your credit history to determine if they are going to approve you or not. The good news is that they will usually look past your credit score and spend more time on the unique factors that led you to that score. For example: did you lose a job and struggle to make your mortgage payments, but never missed a vehicle payment? This will certainly help your case in getting approved for your next vehicle.

Again, like those with good/excellent credit, be sure to have an idea of what rate you can get from a third party lender so that you are not taken advantage of in the dealership and end up with an inflated interest rate. Credit Unions are great resources for people that find themselves in this group, as loan officers can really stretch the program rules to get you a great rate.

If you have a poor credit history:

I’m going to skip the part where I attempt to dissuade you from purchasing a vehicle in the first place and assume that you need a vehicle for school, work, etc.

If you find yourself in this category, the dealer will start by submitting to up to 5 lenders to try to get a valid approval. Valid meaning that the bank is willing to loan you the amount requested for the term requested, etc. These types of application often involve a phone call from the sales manager to the bank credit analyst to answer questions about the loan and can take quite a while. During business hours, expect for it to take up to 45 – 60 minutes.

Especially if you find yourself in this category, I would encourage you to work with your local credit union to see if you can qualify for a loan. Local credit unions will often offer much more competitive rates than dealerships for individuals that have less than stellar credit.

Presentation of Payment Options

Now that the dealership has a valid approval for your new vehicle loan, they will present you with payment options. This will either take place in the finance office (i.e. the place where you go to sign all of the paperwork) or in the salesperson’s office. 

Expect to see a grid that is made up of various loan lengths and sizes of down payments that you can pick from, such as this:

One question that often comes up when purchasing a vehicle at a dealership is how to pay for it. Let’s be honest: not many people have the option to pay for a car in cash and need to finance some or all of the purchase. The good news is that dealers know this, and go out of their way to make this process as easy as possible. Gone are the days when you have to pay cash for a vehicle. In fact, according to Experian.com, nearly 85% of new vehicles purchased in 2019 were financed. Financing a new vehicle has many advantages, such as: Spreading out the large purchase into more manageable monthly payments Get to enjoy your new car now, and pay for it over several years Keep more cash in the bank to weather an unexpected event Take advantage of low interest rates Keep your hard earned money working for you through investments This guide will help illustrate the process of financing a vehicle at a dealership and offer helpful advice to ensure that you have the best possible experience. As always, please leave a comment below if you have any questions or comments about the financing process. The Beginning: Agreeing to Purchase a Vehicle and Providing Your Information The first step to financing a vehicle: finding a vehicle to finance. We will assume that you have found the vehicle of your choice, negotiated to get the best possible price and terms, and are ready to move forward with the purchase process. Now, the salesperson will start the financing process. This involves taking a credit application, either electronically or with pen and paper. It is also common for the salesperson to make a copy of your driver's license if they haven’t already. Be prepared to provide information such as: your full name current address Social security number Date of Birth mortgage/rent payment income information like gross pay I would encourage you to provide as little information as possible until after agreeing on a bottom line purchase price. This means the price of the vehicle minus rebates and with all taxes and dealer fees added in. How the Dealer Arranges Financing? The salesperson will now disappear for a brief time to go speak with a sales manager. At this point the sales manager will “pull” your credit, which basically means that the dealership obtains your credit score and a copy of your credit report. This allows the dealership to learn more about your financial background and which lenders might be best suited to finance your new vehicle. Next, the sales manager will “submit” you to one or more lenders for financing. This is the official step in the application process where each lender will approve or deny your loan application. The sales manager will submit a lot of information to the lenders, both about you and the vehicle you are purchasing. Some items that will be included are your personal information, information about your trade in (if applicable), and information about the vehicle you are purchasing, such as the purchase price and what the vehicle is worth. The next step depends on your credit history. If you have a good/great credit history: This process is fairly straightforward and quick, with the dealership shopping for the lowest rate to present you with. The dealership will normally submit to up to three lenders and leverage each of them against each other to find the best rate for you. Be sure to go into the dealership with an idea of what rate you could get from your preferred bank/credit union so that you ensure you receive a competitive offer. If you have a marginal credit history: This part of the process can take a little longer, as each lender will have a credit analyst really dive into your credit history to determine if they are going to approve you or not. The good news is that they will usually look past your credit score and spend more time on the unique factors that led you to that score. For example: did you lose a job and struggle to make your mortgage payments, but never missed a vehicle payment? This will certainly help your case in getting approved for your next vehicle. Again, like those with good/excellent credit, be sure to have an idea of what rate you can get from a third party lender so that you are not taken advantage of in the dealership and end up with an inflated interest rate. Credit Unions are great resources for people that find themselves in this group, as loan officers can really stretch the program rules to get you a great rate. If you have a poor credit history: I’m going to skip the part where I attempt to dissuade you from purchasing a vehicle in the first place and assume that you need a vehicle for school, work, etc. If you find yourself in this category, the dealer will start by submitting to up to 5 lenders to try to get a valid approval. Valid meaning that the bank is willing to loan you the amount requested for the term requested, etc. These types of application often involve a phone call from the sales manager to the bank credit analyst to answer questions about the loan and can take quite a while. During business hours, expect for it to take up to 45 - 60 minutes. Especially if you find yourself in this category, I would encourage you to work with your local credit union to see if you can qualify for a loan. Local credit unions will often offer much more competitive rates than dealerships for individuals that have less than stellar credit. Presentation of Payment Options Now that the dealership has a valid approval for your new vehicle loan, they will present you with payment options. This will either take place in the finance office (i.e. the place where you go to sign all of the paperwork) or in the salesperson’s office. Expect to see a grid that is made up of various loan lengths and sizes of down payments that you can pick from, such as this: (((loan term grid))) Now, you need to select which option works best for you. I would encourage you to do a few things here: Ask about the rate for each term option. For most lenders, the longer the length of the loan, the higher the interest rate. Even though the lower monthly payment might be appealing - if you end up paying thousands of dollars more in interest, was it really worth it? Pick the longest term that has a rate under what you deem to be a competitive rate. For example, if your local credit union offered you a 4.5% interest rate, and the term for the 60 month rate through the dealership is 3.75% and the term for the 72 month rate is 4.5%, choose the 72 month option. Do not sign up for more payment than you can comfortably afford. Look, you are buying a car here - and 95% of the time, there is a cheaper option that will accomplish the same task. That car will only be “new” in your mind for a short period of time, and you will have to make many payments after you refer to your vehicle as just a “car”, instead of your “new” car. Sign on the dotted line Congratulations, you purchased a vehicle and the dealership arranged financing for you. This enables you to drive away from the dealership in your new vehicle and not have to make a payment for up to 45 days. You also just had to sign several forms instead of jumping through a ton of hoops to get financing through a third party, or pay cash for the vehicle. Now, sit back, relax and enjoy your new vehicle. Have questions or comments about how to finance a vehicle or an interesting experience in a dealership? Please let me know in the comments below. Have fun. Save money. Live well. Chris

 

This is an example of a payment grid that is used to present different payment options based on the length of the loan and the amount of down payment.

Now, you need to select which option works best for you. I would encourage you to do a few things here:

Ask about the rate for each term option.

For most lenders, the longer the length of the loan, the higher the interest rate. Even though the lower monthly payment might be appealing – if you end up paying thousands of dollars more in interest, was it really worth it?

Pick the longest term that has a rate under what you deem to be a competitive rate.

For example, if your local credit union offered you a 4.5% interest rate, and the term for the 60-month rate through the dealership is 3.75% and the term for the 72-month rate is 4.5%, choose the 72-month option.

Do not sign up for more payment than you can comfortably afford.

Look, you are buying a car here – and 95% of the time, there is a cheaper option that will accomplish the same task. That car will only be “new” in your mind for a short period of time, and you will have to make numerous payments after you refer to your vehicle as just a “car”, instead of your “new” car.

Sign on the dotted line

Congratulations, you purchased a vehicle and the dealership arranged financing for you. This enables you to drive away from the dealership in your new vehicle and not have to make a payment for up to 45 days. You also just had to sign several forms instead of jumping through a ton of hoops to get financing through a third party, or pay cash for the vehicle.

Now, sit back, relax and enjoy your new vehicle.  Have questions or comments about how to finance a vehicle or an interesting experience in a dealership? Please let me know in the comments below.

Have fun. Save money. Live well.

Chris 

For more interesting blogs. Visit The Fire Race

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