Why Do Car Dealers Want You to Finance Through Them?

Car dealerships actively encourage customers to finance vehicle purchases through them. This preference stems from distinct business considerations that benefit the dealership financially and operationally. Dealers integrate financing as a core component of their revenue generation. The financing department plays a significant role in the dealership’s overall profitability, extending beyond the vehicle’s sale price.

Direct Financial Gains from Loans

Dealerships act as intermediaries, connecting customers with banks and credit unions for auto loans. A primary profit method is “dealer reserve” or “participation.” Lenders provide a “buy rate,” the minimum interest rate based on creditworthiness. The dealership marks up this rate, typically 1 to 2.5 percentage points, to create the “sell rate” presented to the customer.

For example, a 2% finance commission on a $25,000 loan over 60 months could generate over $1,200 in profit. A substantial portion of this markup is paid as commission. This practice, though legal, can result in a higher interest rate for the customer than if they approached the lender directly.

Dealers also earn flat fees or commissions from lenders for originating loans. This is common with promotional offers, like 0% interest loans, where manufacturers’ captive finance companies may pay a fixed amount for processing the loan. These fees range from $100 to several hundred dollars per loan, or up to 5% of the financed amount. Dealerships maintain relationships with multiple lenders, allowing them to shop for competitive rates and terms to maximize earning potential.

Revenue from Associated Products and Services

The financing process offers dealerships a significant opportunity to sell additional products and services, which contribute substantially to their overall revenue. These offerings are presented during financing discussions and can be rolled into the monthly car payment. This bundling strategy makes additional costs less impactful, as they are spread over the loan term instead of being an upfront lump sum.

Extended warranties, or vehicle service contracts, are a prime example. These contracts cover repairs beyond the manufacturer’s standard warranty. Dealerships realize substantial profit margins on these sales, with markups often ranging from a few hundred dollars to over a thousand, or even 40-80% of the consumer cost.

Guaranteed Asset Protection (GAP) insurance is another common product. This coverage protects the buyer if the vehicle is totaled or stolen and the insurance payout is less than the outstanding loan balance. Dealers mark up GAP insurance, with average markups ranging from $200 to $600.

Beyond warranties and GAP insurance, dealerships offer various other add-ons integrated into the financing package. These include paint protection, fabric protection, tire and wheel protection plans, or anti-theft devices. Consolidating these costs into the financing agreement makes them easier for customers to accept, increasing the total transaction value and dealership profit.

Strategic Sales Advantages for Dealers

In-house financing offers dealers advantages beyond direct financial gains from loans and associated products. It streamlines the car-buying process, creating a “one-stop shop” experience. This convenience facilitates sales and quicker transaction closures, as customers do not need external financing before visiting. By handling both the vehicle sale and financing, dealerships maintain greater control over the entire sales process, from negotiation to final paperwork.

Offering financing options also provides dealers a valuable tool for inventory management. They can leverage competitive financing deals to move specific vehicles, such as older models or those with lower demand, by making them more financially attractive. This flexibility in financing terms allows dealerships to adjust their sales strategies to clear inventory efficiently. Tailored financing solutions can also help overcome customer objections related to price or monthly payments.

Providing convenient financing options gives a dealership a competitive edge. In a market where many dealerships offer similar vehicles, the ease and speed of securing financing can be a deciding factor. An integrated purchase experience attracts and retains customers, fostering loyalty and potentially generating repeat business.