In Profit Pockets and How to Avoid Them: Add-Ons, we discussed how the Finance & Insurance Department utilizes add-ons to create more profit during your car buying experience. Unfortunately, that’s not the only thing you need to be wary of in regards to F&I.
While you might be well informed on a vehicle’s pricing, it’s likely you’ll find the rest of the transaction is largely a mystery. Car-buyers tend to extensively research a vehicle’s pricing to ensure they’re getting a fair deal. However, knowing the price of the vehicle isn’t enough. You have to come into the dealership knowing what is fair in each part of the transaction.
Because financing is one of the top four frustrations in car buying, many dealerships use this as an opportunity to reap additional profits. In fact, according to CNW, the percentage of dealership profits coming from the F&I Department has gone from 28% – 56% from 1992-2012.
One common occurrence is the dealership offering you an above market interest rate. This may sound like an event that’s easy to avoid but even those informed on a fair interest rate can end up drastically overpaying. And here’s how:
You find a used car online for $20,000 that you really like. You played with the financing calculator online and it gave you a fair market interest rate of 5% and after some tweaking, you decided that $322.10/ month over 72 months was in your budget.
You go to the dealership, look at the car, and finally sit down with the salesman. He informs you that he ran your credit and they scored you an 8% loan over 72 months—only $340.98/ month. That’s less than a $30 difference from your initial estimate! Awesome right?
Wrong. While less than $30 more per month doesn’t seem like a huge difference, you’re paying an extra $2,000 over the life of the loan. Now that’s quite a hit to the wallet.
Now, this doesn’t always happen, but the point is to be informed. Know your credit standing, fair market interest rates, and what is available through other financial institutions. That’s right, you don’t have to get a loan from the dealership. Just like you would with your car, shop around and see where you can get the best loan.