In an automobile dealership, the Financing Office is one of the most profitable benefit centres in a car dealership.
Certainly, car dealers are entitled to make a legal profit like any other business, but when they take part in securing a car loan for a buyer, the income they receive, called a “dealer reserve,” implicitly falls out of the wallet of the customer in the form of a higher interest rate.Do you want to learn more? Visit 6 ways to maintain your gearbox in good condition.
I served in many major new car dealerships as a Financial Manager, and I can assure you that I have most frequently made $1,500 to $2,000 “dealer reserve” on securing every specified car loans for the car dealer.
When talking to the client about adding “credit life” and or “credit disability” protection on the car loan, the car dealer often gets a rather profitable profit. There are things that if the client negotiated their own auto loan, they will not be willing to offer or earn from.
I’m not going to debate the pros and cons of this insurance coverage, but typically the auto dealer would receive 40 percent to 50 percent of the gross payment spread over the loan term—and the premium is not cheap—especially on disability insurance!
The auto dealer will also give them an enhanced guarantee or other add-ons such as an insurance kit and receive a mark-up if the buyer arranges their own car loan (extremely high mark-ups on these products). Then the consumer may apply to have these add-ons in their auto loan from their own provider.
The bottom line is that they will actually save themselves thousands of dollars if a buyer arranges their own auto financing that might otherwise have went into the wallet of the car dealer in the form of “dealer reserve” and other fees.
The only way you can let the auto dealer negotiate the car loan is when you take advantage of special bonus support from the seller, such as 0 percent, 1.9 percent or whatever. And so, most of these prices are in spite of the discount, but you have to measure the rate savings against the amount of the discount to decide the most profitable way for you.