How do car dealerships make money? The answer lies in indirect financing. Dealerships arrange indirect financing through their finance department, which then sells the contract to a third-party finance company. These loans are typically made to consumers with poor or bad credit, which is why they’re commonly referred to as subprime financing. But there’s more to indirect financing than just the interest paid by consumers.
One of the biggest profit centers for dealerships is financing, where they earn a percentage of the interest rate and a fee when they arrange the loan. These additional fees help the dealership sell more high-margin add-on products. Moreover, dealership financing has led to increased profits per new vehicle, according to J.D. Power, a data and analytics company. For example, a prearranged 60-month loan may have 4% annual percentage rate. However, a car dealership can obtain the same loan at a lower rate and thereby reduce the customer’s monthly car payment.
It is best to compare rates and terms before selecting a loan. Compare the down payment and number of months to pay the loan. The lower interest rate may entail a higher monthly payment, but the total cost will be lower overall. Remember that car financing is a major profit center for dealerships. To avoid being ripped off, shop around. Get several quotes from several banks and take your time to shop around.