Tips, Tricks & Trends

Negotiating the Interest Rate in a Car Deal Can Save You a Lot of Money

Buying a car from a dealership can be a royal pain if you don’t know what you’re doing. Don’t get us wrong, many dealers nationwide are now doing their best to make sure that the sales process is much smoother, safer, and overall pain-free nowadays, but truthfully, a car deal always comes down the numbers. And when it comes to getting the best deal possible the next time you buy a car from a dealership, it’s a good idea to take a second look at the interest rate that you’re presented.

Understanding dealer financing is important

If you ever apply for financing with a dealership, it’s important to keep in mind that the dealership is not the one loaning you the money for the car, a bank or credit union is. What this means is that the dealership typically has a special relationship with the banks that they get financing through, which means that they have the ability to get you a great financing rate. But on the flip side, it also means that the dealer can mark the rate up.

A visual of an auto loan, represented by a red toy Volkswagen bug parked on four ascending stacks of silver coins
A visual of an auto loan | Aytac Unal/Anadolu Agency/Getty Images

Since the dealer acts as a “middle man” between you and the lender for the auto loan, you can view them marking the finance rate up as a sort of a commission that you have to pay, this is also known as a “finance reserve.” This reserve comes via a 1-3 percent mark-up over the “buy rate,” which is the actual interest rate that the bank approves you at.  

For example, if you apply for financing through the dealership and they’re given a 5 percent buy rate from the bank, then they might show you 7 percent instead, which is known as the “sell rate.” In this case, they pocketed the extra money that came from the 2 percent increase, which is usually paid to them as a flat rate from the bank.

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How do you negotiate the interest rate?

After you have selected the car that you want to purchase and it’s time to go over the pricing for it, remember to take a closer look at the financing rate that the salesperson presents to you. If anything, ask them what the buy rate is and see if they can do anything better than what they presented you. Hold firm and see what they say.

Chances are, the dealer most likely got the buy rate from the bank and marked it up a couple of percentage points to see if you would accept it. And it’s easy to have any buyer accept whatever rate because they’re usually none the wiser. But if you’ve done your homework and know what your Fico 8 credit score is, then you’ll be ready to counteract their financing offer and possibly get a better rate, which could save you a lot of money in the long run.

A car dealership salesman works on a sale
A car dealerships salesman | Susana Gonzalez/Bloomberg via Getty Images

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What’s the point of applying for dealer financing?

By now, you’re probably wondering what the point of financing through a dealership is if they’re just going to mark up the financing rate in addition to playing with the price of the car. The best part about financing through a dealership is that you don’t have to spend the time applying for a loan on your own and researching the best finance rates since they do everything for you after you fill out the credit application.

However, if you’re willing to spend the time and effort to find your own financing, then you can end up saving a lot of money and you can finance through whichever lender you feel most comfortable with. If not, then you can let the dealer decide your destiny, just make sure to negotiate before signing the contract.