Cars are really awesome to have. They get you where you want to go when you need to go. And they cut the time it takes to run errands, let you cruise around when you are bored or just need some quiet time, and take you to see friends and family. They are incredibly useful—until they break down anyway, or start to show signs of it.
At that point, I always wish that I could be in good enough shape to run to my destination, or at the very least have some public transportation in my city. Buying a car is not an easy task, especially if you have to come up with the money to do it. With all of the other stress in life, who wants to add car buying to the mix? As if finding myself a vehicle is not enough, I have a child who just turned 16 and two more that will be turning 16 over the next few years. Thank goodness I have a decade before the little one hits that age.
Considering all of the car buying my husband and I will be doing over the next several years, auto financing is definitely going to be part of the equation. For many, the auto loan process can get confusing, but it doesn’t have to be. Let’s try to simplify it.
The Basics of the Auto Loan Process
An auto loan is very similar to almost any other loan you might get. At its very basic nature, it simply means that you are borrowing the money to pay for your new vehicle. You then repay the loan in monthly payments. The differences between an auto loan and other loans come in with the actual lenders, interest, and terms. We are going to break down the steps you will go through at the dealership, the advantages and disadvantages of the auto loan process at the dealership, and how to make dealer financing work for you. Don’t worry, by the time we finish, you should be ready to take on the world- or at least the car dealership.
Steps in the Auto Loan Process at Dealership
If you have never gone through the auto loan process at a dealership, you are probably wondering what that entails. Let me say that some of the steps will look similar to doing it through other institutions. Some are nothing like it. Let’s start at the very beginning.
First, though, a little disclaimer: though I am going to be very truthful with you about the sales process and salespeople, not everyone is the same. There are many salespeople out there that are quite unscrupulous, but some are not. Either way, the best thing to do for yourself is to expect the worst. So you are ready for whatever comes your way.
Stepping Onto the Lot
You pull up at the dealership and get out of your car. You may choose to go inside and ask for a sales rep, but if you just walk around the lot for a minute, they will find you. When they reach you, they are going to take control of the situation immediately.
They will ask you questions, i.e. what type of vehicle you are looking for, and they are going to start showing you cars. Do not be surprised when they take you to a vehicle that is nothing like what you mentioned. They want to sell the car that is going to line their pockets.
And salespeople excel at painting an awesome picture. Before you know it- if you are not paying attention- you will believe that the car that is twice the price you were hoping to pay is the car you absolutely have to have. This is why you need to know as best as you can what you want and how much you are willing to pay beforehand.
Choosing the Car
One fun thing about buying a car is getting to test-drive vehicles. Take advantage of this- not in a bad way. Just be sure that you test out the car or cars you like and that you still like them after driving them. And do not feel pressured to test drive a car you do not want. There is no reason to tempt yourself. Stick to your guns.
When you find something you really do like, the salesperson is going to tell you all about the promotions they have going on, though they will probably still try to talk up another car or two. When you make up your mind, they will take you to the finance office.
The Finance Office
Here’s where it gets fun- not. You now have to deal with all of the wonderful financial documents and so on. If you have a trade-in, you ask for an offer on it. Trade-ins can assist you with your down payment. This is also where you can show or talk about any other offers you have received from other institutions.
With or without a trade-in, there is certain information you will need to complete the auto loan process and application. Here are the most common to help you speed up the auto loan process:
- Proof of Income- Recent pay stubs usually, but earning statements and tax records if you are unemployed or have uncommon income streams.
- ID and social security cards
- Proof of insurance- This may seem strange since you do not yet have the car, but they usually will not let you drive off of the lot without insurance, so be prepared to go get some and come back with proof.
- A list of references- Have family, friends, coworkers, associates or anyone else that will give you a good reference. It is best to have a mix of the types of references, such as some family, some coworkers, and so on. And, if you have any financial references such as a landlord or previous lender that are willing to vouch for you, add them to the list.
- Collateral- This is not necessary for everyone, but if you know your credit is less than desirable, collateral can help. Take proof of that collateral with you but do not offer it up unless you are rejected without it. (You don’t want to just give it away if you don’t have to.)
- Bills- Many lenders will not ask for this, but some will when they are calculating your debt-to-income ratio.
There is always a chance the lender will ask for more, but these items definitely cover most of it. Also, showing up with what you need can make you look a little more responsible to the lender.
The Finance Manager
Once the manager has your application and your information, he or she will pass it on to their lending partners. It usually does not take long for the offers to come back as preapprovals- sometimes it takes just a few minutes. Once they have received the offers, the information will be passed along to you. We will talk about this a little more in-depth in a moment.
Should you choose to accept any of these offers, the paperwork will resume- and it may feel like you are signing your life away. Do not sign a thing unless you understand it. That teeny-tiny print at the bottom of your applications and contracts may be a headache to read, but not reading them can put you in a situation you never wanted to be in. For instance, you may think you signed up for a fixed interest rate because that is what you were quoted, but the fine print may say that the interest rate will change after a certain time frame or that it is actually variable. If the dealer really wants your business, they should have no problem going over the paperwork line by line if that is what you need. If they do have a problem, move onto another. You need transparency.
Here’s where it can get a little troubling, and irritating: A few days after you leave the lot, the finance manager may give you a call. Unfortunately, this is not a “Hey, just wanted to see how you’re doing” type of call. No, more than likely, they are about to try to sell you a big one- a big lie, that is. They will probably say something like, “The financing fell through,” or even, “We found you a better deal. We just need you to sign a new contract.”
Let’s start with this: The financing is in place when you sign those first contracts and drive off the lot. It does not “fall through”. This is simply a gimmick to get you to sign onto another interest rate and repayment term- a much less favorable one. Do not fall for this. If you signed a contract, your financing is in place.
If they call for a lower payment, that usually means they are going to call you back later with something that is going to cost you more. For instance, sometimes they will say you have to sign a warranty or purchase additional insurance to get the lower car payment. The problem is that whatever the extra thing you have to purchase is taking your payment over the amount of the original payment, so you are really not getting a lower payment at all. You can find stories about such things happening all over the internet, so it happens more than I care to think about. Beware of anything that is going against what you already agreed to.
Once you have received your loan, you need to be sure you are making your payments on time every month. The last thing you want to do is work so hard to get the car only to lose the car, your money, and all of the hard work you put into it just from missing a payment. Sit down as soon as you know your payment amount and budget it in.
Advantages and Disadvantages of the Auto Loan Process at Dealership
As with all things in life, there are good points and bad points. In the case of going through the auto loan process through the car dealership, both are plentiful. Overall, getting an auto loan is obviously going to get you into a car quicker than just saving up the cash to do it yourself. That is the sad truth for most of us. But is getting a loan through the dealer the best idea? Some people swear by it, saying it is the easiest way to go. Others avoid dealership financing at all costs. Let’s take a look at the pros and cons so you can make that decision for yourself.
Advantages of the Auto Loan Process at Dealership
Dealerships are usually connected to at least a few finance options, meaning that you often get more than one finance option. When I worked for Mattress Firm, a very large mattress retailer, we had three lending options- for good reason: most people do not have thousands lying around to purchase a mattress outright- no more than they have tens of thousands of dollars to purchase a car.
So the company connected with three different lenders that gave buyers options, but they were different. The first one we always recommended and tried to get the customer approved for was the one that offered the best interest rates and repayment terms. That lender would often offer 0% interest for three to five years. But they required really good- almost perfect- credit.
The second lender accepted credit scores that were lower, but they also offered less favorable repayment terms. Still, the second lender was better than the third, which was 90 days same as a cash finance option. When those 90 days were up, interest shot through the roof and, if you were not careful, you would pay three or four times the price of the mattress.
While not exactly the same, dealership financing is similar. The finance manager will run your credit and information. If any of their lenders are willing to extend you credit, you should end up with a few different options to consider.
One good thing about dealer financing is that it can be treated as a one-stop-shop. You go in, find your car, test drive it, fill out for financing, and- if everything lines up- drive off with your car on the same day. Going through an external lender adds more steps and more time to the process. It can still happen in a day or two, but it could take even longer.
When you finance through the dealership, you may get access to promotional prices. Just as the mattress store I mentioned offered 0% interest for a specified time, you often see those stickers on the cars that are sitting on car lots. That does not usually happen through external lenders, though it never hurts to look around.
Disadvantages of the Auto Loan Process at Dealership
You Might Not See the Best Options
Here is something you need to know about the auto loan process at dealership: Just because the finance manager receives multiple offers does not mean you will be shown the best. The other part of being connected to lenders is that the finance manager gets a fee for sending them business. Unless you run across one that is really honest, they will look over the offers and present the one to you that gets them the best fee, not what is best for you. While there is nothing with them making money, too- everyone has bills to pay- you do not want that to be at a major expense to you.
Promotional Prices and Offers Can Be Misleading
Many times, the promotional prices offered through the dealership are only available for certain credit scores, or they are conditional. Additionally, any rebates, low interest, and so on may not be as good as it sounds. You might find that taking a low interest rate from an external lender will cost you much less in the long run than the promos offered through dealer financing.
You have to really consider what is being offered to you, which is usually difficult when you are at the dealership actually in the midst of the auto loan process. The salesperson does not want you to think it through. They want you to get excited about what they offer and get you signing the paperwork, immediately. The sooner that happens, the sooner they get paid. Have you ever noticed that when you are shopping for something that the salesperson does not want to leave you alone? They do not want to be quiet and just keep talking up the sale. If they ask you questions, those questions are specifically geared towards showing you just why this sale is the best thing that has ever happened to you and how the product is going to change your life.
That is what they are trained to do. It is not that the product or sale is a bad thing. And- just like the mattresses I sold- they can impact your life. It is just that you need a moment to think. To really consider what you are being offered and decide if it is right for you. Salespeople know- or should I say, they fear- that if they leave you alone, they have lost the sale. That the illusion will wear off if they are not there painting a picture for you. That is why it may be best that you step away- possibly off of the lot- to think and run your calculations.
Lack of Personal Relationship
When going through the auto loan process with your bank or external lending institution, there is a good chance that you will form a personal relationship with them. You may even have a personal relationship already if it is someone you used before. Often, places that you have this type of relationship with are easier to work with, really try to get you a better deal, and try to help in the time of crises. Lending institutions strive for repeat business. Dealerships know that car buying is not something that happens every day, so they are more interested in the now.
Make Auto Dealership Financing Work for You
Choosing to go through the auto loan process at the dealership can be either a positive or a negative decision. The better you educate yourself and prepare yourself to deal with the loan process, the better results you should get. Here are some things you should know and do to be prepared:
See All the Offers
Be sure that you ask to see all of the offers presented. If, for some strange reason they refuse, you should probably move onto another dealer. Unless they have something, aka a really good offer to hide from you, there should be no problem showing you all of the offers.
It is never a bad idea to get prequalified for a loan from an external lender prior to shopping a dealership. Often, if you go in with a preapproval or offer, your dealer will work to beat that offer and rate. This opens up even more options for you and lets the dealer finance department know you are not messing around.
Know Your Budget and Your Credit Score
Know your credit score and the types of terms before going in. It’s sad to say, but there are unscrupulous people out there. If you are not aware of what your credit looks like, the salesperson just might be able to fool you into paying higher interest than you should.
Know what you can afford to pay each month. If you set expectations with your dealer upfront- and stick to them- they will be less likely to mess you up. Know what you can afford, and do not waiver from that, regardless of the “great deals” they try to offer.
Sign Everything Before You Leave
Never, ever, ever leave the dealership without all of your paperwork signed- especially your financing. This will prevent them from being able to tell you the financing did not work out and talking you into something higher. If they try anyway, you can say, “Nope, sorry. I’ve got a signed contract. I get the car and the financing at the price agreed upon.” They cannot back out on that once we sign the contract.
Avoid Impulse Buying
I do not care how hard the salesperson tries, do not sign any paperwork or agree to anything just because they tell you it is the best thing to do. Also, you might notice that if you fall in love with a particular car, they will push and push to try to convince you that if you do not get it now, you are missing out. FOMO, or the fear of missing out, is something that all salespeople learn to use to their advantage. Let me make something very clear: that is not the only car like that. Cars are mass-produced. Sure, that may be that only exact car on the lot at that moment, but they can get another one there. And, guess what, if they cannot- or say they cannot- another dealership will.
A Short Story Time
I remember one time when I fell in love with a specific car and dealt with the, “You better move now! These don’t last long!” Well, I like to think things through, so I say, “I still need to take a moment”. The salesperson kept on, finally stating, “A colleague just told me that he has someone coming in to look at this very car this afternoon.” I was becoming quite irritated- maybe because I did not like sales techniques when I was being trained for them. I value honesty, my time and my money- something I always tried to value with my own customers. (And, there’s a reason that I left that job, anyway.)
Still, he was frustrating me. I wanted to say, “Dude, I know what you are doing and it isn’t going to work.” Instead, I said, “That’s okay! I saw one down the road at another car lot. If this one’s gone, I’ll just move onto that one. No biggie. I think they had a better promotional deal, anyway.” His face went a little white before he recovered long enough to say, “Oh, no, don’t worry about it! I’ll make sure it’s sitting here when you get back.” Yeah, that’s what I thought.
The moral of the story is that you do not have to rush. Take your time, make a wise decision, do not fall victim to the unsavory sales techniques.
I hope that this information has helped you understand what to expect in the auto loan process. And how to make it the best experience for yourself and your pockets. Educate yourself as much as possible to simplify the auto loan process. And, if need be, take a trusted friend along with you who can help keep you on track. If you find that you do not like the offers made to you by the dealership, learn how to shop for a car loan online for a more favorable loan.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.