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Auto dealer financing - When does it make sense?


We dive deep into the car buying, auto lending, and personal finance world in our articles:

Cutting through complexity: A confidence-building car buying approach

and

The subtleties of lending discrimination

But a more nuanced question is when or whether it makes sense to use auto dealer financing. This is the financing offered by the auto dealer after you have decided on the car.


Full disclosure: I have not financed a car in 30 years. My first and only car financing experience was after I financed my first car and paid it off in one year. I am one of those people that has a utilitarian-based "safe transportation" preference for cars and is fine buying cars that meet this minimum criterion. But I certainly recognize my minimalist preference set is not for everyone!


I am also a former bank chief credit officer that oversaw auto lending credit risk management.


The short answer is, it may make sense to use dealer financing, but only as the rational result of your amazing decision process!


In our "Cutting through complexity" article, we present a decision process. The "order of operations" is the most important context needed for answering the dealer finance question.


The idea is, entering the dealership sales environment is the last step in the process of buying a car. We provide a process and tools that help you:

  1. Define your auto-buying preferences.

  2. Weight your preferences in the service of establishing your car-buying utility.

  3. Become pre-approved for auto financing, if needed. This is in service of establishing your car-buying budget.

  4. Research different car-buying alternatives that meet your utility and budget needs.

  5. Then, and only then, you enter the dealership sales environment. This is to validate the car alternative data and, if ready to negotiate the final car alternative price.

  6. If you complete decision process steps 1-4 well, the final negotiations in step 5 are pain-free. This is because you have built confidence via an amazing decision process.

At step 5, if the salesperson offers financing that is a better deal than the pre-approval, you should certainly consider it. Be sure to return to the pre-approval loan offeror to see if they can meet the dealer's offer.


Why does the order of operation matter?

It is huge. In the auto dealer world, they consider the profit margins associated with the car sale and the car financing in total. So if they can get a higher margin on the car sale, then they may be willing to give up some margin on the financing as a sweetener to consummate the deal. As a savvy buyer, you want to squeeze as much margin out of the car sale first. Then, if they are still willing to provide discounted financing, good for you. Frankly, if you are still offered discounted financing after negotiating the car, this is a tell. There is probably more margin to be squeezed in the car part of the transaction. Go back and negotiate a lower price for the car! It is best to keep the financing and car negotiations separate. It is best to walk into the dealership with your best financing offer ALREADY IN HAND.


Shouldn't I test drive a car before I am ready to buy?

Absolutely! There is a difference between being in "research mode" v. "buy mode." In steps 1 and 2, we define the process steps for determining your utility. Understanding your preferences or "what is important to you" about a car is challenging for all people. So it is fine to "kick the tires" and take a few test drives to help you clarify your utility. The tools we suggest are super helpful for this step. Just be clear with the salesperson that you are "just shopping" and trying to learn about your car options. Most salespeople see this as an opportunity to build a relationship. As long as you are clear about your motivation, all good!


Resources

Definitive Choice: For individual or small organization groups - This smartphone app provides a convenient way to enter and weigh your preference criteria, then, enter your potential decision alternatives and their costs. Behind the scenes, it uses decision science to apply your tailored preferences and preference weights to score each of your alternatives. Ultimately, it renders a rank-ordered report to help you understand which alternatives will give you the biggest bang for your buck. Using a decision support app will 1) save you time, 2) optimize your economic value achieved, and 3) increase your decision-making confidence!

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