Why you should never accept financing from a car dealership


OPINION: Would you like to pay fees of $495 to $1,000, which you could avoid by simply making a phone call?

Of course not. It would challenge the belief that anyone would.

Yet that is exactly what happens when people take out loans from car dealerships.

This is because they end up paying “brokerage” fees, which lenders like Oxford Finance and Geneva Finance pay dealers to encourage them to sell their loans.

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These brokerage fees are “disclosed” to buyers in the documents, which many people don’t read very carefully, focusing on getting the car.

In my book, it’s the appearance of disclosure.

True disclosure would involve the car dealership saying something like, “Hey, if you call the finance company yourself, you can get the loan without paying the brokerage fee. You don’t have to, but it’s in your interest to do so.

And that disclosure would continue: “You can negotiate the fee, because the finance company doesn’t have to pay it to me. I could reduce it to $100 on a whim, or $0. So go ahead, bargain hard.

Zuzana Chovanova bought a car, but ended up paying nearly $800 in loan fees and over $1,000 in mechanical breakdown insurance.

STACY SQUIRES / TRICKS

Zuzana Chovanova bought a car, but ended up paying nearly $800 in loan fees and over $1,000 in mechanical breakdown insurance.

Here’s the truth: No one needs a “broker” to get a loan. Finance companies are scrambling to make loans.

Brokerage fees aren’t the only reason car buyers should avoid taking loans from car dealerships.

In addition to brokerage fees, car loans from dealerships may have an additional “margin” on the interest rate.

Yes, the car buyer may end up paying a higher interest rate than going directly to the finance company.

Oh, and I forgot to mention that dealerships can earn commissions on high-priced mechanical breakdown insurance, if they can convince car buyers to sign up.

The extra loan and insurance costs can make buying a car from a dealership very expensive.

I can see how this whole dirty arrangement happened.

Dealerships must compete against a huge person-to-person used car market.

The prices of their cars must allow them to rank highly on Trade Me, so that car buyers who scour the internet for vehicles will notice them.

But dealerships are businesses with overheads that regular car salespeople don’t have. They have premises, debts to repay, insurance to pay on their goods and salaries to their staff.

Loan and insurance commissions allow dealers to make enough money to stay in business, without inflating the prices of their cars.

The government plans to pass a law requiring all financial services companies to have a “fair conduct programme”, under which they should “treat consumers fairly, including giving due consideration to their interests”.

This could put a damper on auto dealer finance and dealer-sold insurance.

It may never happen, so when buying a car, think carefully before accepting financing or insurance from a dealership.

So think again.

So don’t.

GOLDEN RULES:

* Arrange your own financing and insurance

* See all fees as negotiable

* Save and buy cars without financing

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