Learn why you should get pre-approved for your car financing -- so you can avoid big auto financing mistakes
(Note: This article on car financing continues the article on auto financing that you can find by clicking here. We recommend you read that article on car financing first -- if you haven't already done so.)
Car Financing - The Dealer's Perspective
There are two ways a dealership makes money off of the customer buying a car: The front end of the car deal and the back end of the car deal.
The front end is how much the dealership makes selling only the car. In other words, if the dealership pays $20,000 for the car and sells it for $23,000, then the front end of that car deal is $3,000 ($23,000 minus $20,000 = $3,000).
The back end of the car deal is what the dealership makes in the back end products, including car financing, the extended service contract, GAP insurance, life and disability insurance, exterior and interior protection for the car, alarm systems, etc.
Here is one important way the dealership makes money off of selling consumers car financing:
If the dealership bought the interest rate on your car for 5% and sold it to you for 7%, the dealer just made about 70% of the difference on this 2% markup (7% minus 5% = 2%).
In other words, if the dealership bought the interest at a rate of 5% and you finance through the dealership at a 7% interest rate, then the dealer makes money selling you the inflated interest of 7%.
Typically in this scenario, the bank would keep 30% of the additional mark up (2%) and the dealer would keep the other 70%.
As you can imagine, a 2% mark up on a $30,000 vehicle over 72 months is a lot of extra money!
This is why I implore you to check into getting your own car financing through your credit union or bank.
When at all possible, get pre-approved for car financing before you buy a car, and then your transaction is the same as a cash deal.
Here is another car financing example of back end profit:
Let's say you purchased an extended service contract and the mark up was $1,000, and you also purchased GAP insurance, life and disability insurance, and exterior and interior protection for the car from the finance manager, and the profit on alll that was another $2,000 for the dealership.
So, the dealer made $3,000 off of you on the front end of the car deal plus $3,000 on the back end.
That means the dealership made a total of $6,000 profit from you -- and your checkbook!
As you can see, the back end of a car deal can be as much -- if not more --profitable for the dealership than the front end of the car deal!
It's really important that you get educated on car shopping and car financing -- and don’t get taken advantage of.
This article was written by Peter Humleker, consumer advocate, consultant and author of the excellent book "Car Buying Scams, Auto Dealer Executive "Breaks Code of Silence!"-- exclusively for Internet ScamBusters.
Copyright Peter M. Humleker Jr. Reprinted (exclusively) with permission.