How Car Dealers Screw You With Financing (and how they get away with it)
When it comes to financing, car dealers generally do not play fair. There are many dealer financing tricks to contend with. They have an incentive to charge you as much as possible in the annual percentage rate (APR) for the amount you will need to finance. The problem is dealers make a margin on all the deals they write up. The higher the APR, the higher their margin (read paycheck).
Whether you are buying new or used, as a consumer you must be informed and prepared.
In order to keep them honest you will need to know your credit score before waltzing into the dealership. There are two types of scores utilized by the dealers. Most commonly they will use the traditional FICO score, which is available to you for free www.credit.com, The other is called the "Auto Industry Option Credit Score", otherwise know as your auto score. The bad news is that consumers do not have access to this score.
The good news is that you can get a pretty good sense of what your Auto Industry Option credit score will look like from your credit report which you can obtain for free at www.annualcreditreport.com. The even better news is that even if you have a so-so standard FICO score, if your auto credit score is good you may still get a decent auto loan. This car credit score puts a lot more emphasis on how you handled previous auto credit. It can work in your favor if you have satisfied a car loan with no late payments.
However, it will work against you if you never had a car loan (first time buyers beware).
The Auto Industry Score essentially provides a dealership with a 3-digit number that ranks risk of default for the term of the loan. If you’ve had previous car loans and have paid them promptly and in full (something you should be able to see on your regular credit reports) you will generally have a good Auto Industry Score. On the other hand, dings to your credit report for missing or late payments on installment loans for auto financing can kill your Auto Industry Option score.
Dealers are increasingly using this scoring system and will choose this score especially if it reflects poorly on you so they can justify the higher APR on an unsuspecting consumer. Your job is to make sure they use the higher of the two scores that are available to them and have your loan based on the better of the two. This is where knowing your FICO score is important, for it could save you a lot of money in your loan agreement.
So when you walk into the dealership you should have a copy of your FICO credit score in hand. If you are told that your score is less, then stay on course, then pull it out and show them. You will be amazed that the leverage you have if you are informed. Remember, they want, no, need your business. You will force their hand and get a much better financing rate as a result.