Your car served you well for many years, but now you've decided it's time for a new one. After doing suitable research, you've found the car of your dreams at a local dealership. Now all that's left to do is to finance it.
You fill out a loan application, and in a relatively short time, you have a financing offer. What happens when you fill out the auto loan application at your dealership? How are they able to secure financing so quickly? Behind your auto dealer's offer, an extensive network operates to make that offer possible.
Credit bureaus supply information from your credit history to potential lenders. Those lenders apply automated credit-scoring systems to assess your creditworthiness and consider other information (such as employment history) to assess the overall risk of lending you money. Underwriters compare this risk assessment against the lender's qualification criteria, and if you qualify, they translate this information into the loan terms that will be offered to you.
The whole process is built on a quick assessment of credit, so it pays to check your credit score and credit report before car shopping to make sure that you are well qualified for an auto loan.
If your score is not what it should be, consider delaying your auto purchase until you can qualify for better terms. An improved interest rate can save hundreds of dollars over the life of your auto loan.
Dealers are typically the middlemen in the auto financing process. Loans acquired through dealers are generally sold to banks or other financial institutions (known as assignees). They may have relationships with a specific lender, or they may ask for multiple offers and choose the lender with the best offer as the assignee.
It takes time for the lenders to underwrite your offer fully, but this does not necessarily stop you from taking your car home straightaway. The information that you supply to the dealer allows them to search their financing network for the best loan deal for which you qualify. Generally, your dealer's Finance and Insurance (F&I) department has enough past information on deals to correctly assess a reasonable offer, and they can proceed with terms assuming that the chosen lender will follow through on purchasing the loan.
Dealers have the legal option to mark up the interest rate to provide a cushion in case the initial lender estimate does not result in approval – and also to create a margin for themselves. Without a margin, it is possible for a consumer to get a call from a dealer stating that the auto loan was not approved at the stated rate and that the sales contract will have to be rewritten to include a higher rate.
Check your sales contract to see if the sale is contingent on financing approval from the lender. By asking the dealer to verify financing approval before signing, you may have to wait a few days to take your new car home – but at least you won't have to renegotiate for a car you thought you already purchased.
Remember that you don't have to finance through the dealer – you can arrange your own direct financing through a lender of your choosing. By getting pre-approval through a separate lender, you have leverage against interest rate markups as well as upselling, add-ons, extended warranties, and similar margin-padding tactics.
When seeking your own financing, make sure to shop around. It's a common myth that multiple inquiries will hurt your credit score, but that's not true for all inquiries. Director of Public Education for Experian Rod Griffin notes: "Credit scores will see those inquiries, but because you are shopping for the best rates, and most of us are going to buy only one house or one car, they'll count those inquiries as only one inquiry or not at all in the newest scoring system." Lenders realize that your multiple inquiries are directed toward a single purchase.
You can still choose to finance through the dealer if you prefer, but at least you'll have options – and regardless of which path you choose, that same network of underwriters, credit bureaus, and scoring systems are chugging away in the background, making your experience as quick and painless as possible.
If you are interested in an auto loan, visit our curated list of top lenders.