Car Financing - Auto Financing - How It Really Works

One of the most misunderstood concepts about buying or leasing a new car is how car financing really works. Every new car buyer should be aware that cost if insurance can vary significantly. The key idea to understand is that car dealers do not finance car loans and leases. However, dealers can most definitely influence how you finance and what you pay for financing.

Dealers always sell for cash

Car dealers are business people who have a certified franchise with one or more car manufacturers. They do not work for the manufacturer; the manufacturer does not possess the dealership.

Dealers purchase cars from the manufacturer, usually with huge "floor-plan" loans from a bank or finance company. Interest is charged by the bank on these loans. Dealers have to sell the cars off to pay these loans with related interest, as well as cover other operating expense of organizing a business.

The dealers always receive cash, after he sells or lease a car, whether it's straight from the customer, or from a finance company or bank who has loaned a customer the money.

Dealers don't finance car loans and leases
Dealers are not bankers. They do not directly finance cars they sell or lease. They work with some financing companies or banks to provide the customers with finance. The dealers arrange financing as a service on customers’ behalf. If the customers choose he can also arrange his own financing.

Dealers pre-approve car financing
A dealer may do a brief introductory check of a customer's credit account using any of the main credit reporting agencies. This is not done for loan or lease sanction, but only to decide if the customer has such serious credit problems that it would not be favorable to carry on with the deal.

The deal is NOT done after your car finance contract is signed
Many customers wrongly presume that when the dealer says he has done a credit check and lets the customer sign papers that the deal is done and the whole thing is officially wrapped up. That’s Not correct. The deal is not completed until financing has been set and the dealer has been paid for his car.

What you sign and what it means
When a customer finances a car with a loan, he or she signs papers that basically reads as: " I agree to purchase this car, using finances that will be loaned to me by a finance company or bank (if I am approved), and that the dealer will endeavor to position this loan for me, and, if the funds are not agreed by a finance company or bank, the deal is void unless the dealer can find a different finance company that will approve me. If the loan is agreed, the finance company or bank pays the loan that was funded, directly to the dealers. The finance company or bank will then work straight with me to assemble monthly payments to repay that loan. In this way the dealer will have then been paid in full for his car and will no longer be involved in the lease or loan."

If your lease or loan is not approved
The finance company or bank can find problems in the customer's credit history/score or debt-to-income statistics that makes them flag the application as great risk. The dealer is then asked to notify the customer that the application was not accepted, or that a co-signer is required in order to re-submit the application for approval. Finance companies and banks work through the dealer; they do not work with the customer straight until the payment book arrives after consent.

What choices do you have?
First, the customer should always be acquainted with their own credit history previous to approaching the dealer’s showroom. Second, the customer can inquire the dealer if he works with other banks or finance companies that might be willing to grant the loan or lease. Third, the customer can at all times shop for his own car financing and get pre-approved.