Want to save money on auto loans?This one trick can save you a ton of cash

Doing this can save you thousands of dollars when buying a car.

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Key Point

• There are two ways to get a car loan: get a loan from a dealer or raise money from an outside source.
• Many dealers make most of their profits from selling loan financing, insurance, guarantees, and other services.
• Dealers usually mark up interest rates on the loans they arrange. This means that you will pay more interest over the life of the loan.

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Are you in the new or used car market? If so, you may be wondering how you can save the most money. We researched the cars we wanted, completed test drives, compared prices, and helped negotiate the best deal. These are all important steps, but many buyers overlook this one trick that can help them save a significant amount of cash.

Instead of going through the dealership, you should always use external financing for auto loans to walk into the dealership. Here’s why:

How car dealerships actually make money

Not many people realize that dealers don’t make most of their profits selling cars. In fact, research shows that, on average, dealers make only about $65 per used vehicle and lose about $200 per new vehicle sold. So how do dealers make a profit? Their main sources of profit are financing dealers, selling extended warranties, gap insurance, additional car add-ons, and other services.

What is Dealer Financing?

Most people don’t have the cash to buy a new or used car quickly, so they have to borrow money. Car dealers offer loans to simplify the car buying process. Just pick the car you want, pay the down payment, complete the paperwork and the car is yours!

However, many people do not realize that dealers usually mark up the interest rates on the loans they arrange. This means that you will pay more interest over the life of the loan if you go through a dealer. Additionally, the interest rates offered by dealers can be very high if your credit is poor.

A dealer might get you 3.5% off a $40,000 car you want to buy. Over five years, this equates to him $3,660 in interest. The dealer may then increase the rate to 5%, which equates to approximately $5,290. The dealer keeps the $1,630 difference as profit. This is money you could potentially keep for yourself by finding outside funding.

How to proceed with external funding

If you decide to use external financing (also known as direct lending) for your auto loan, you need to do some work. First, you need to find a moneylender. You can use your bank, credit union or search online to find the best rates. The key is to compare offers from multiple lenders at once and choose the one that works best for you.

Once you’ve found a lender, you’ll need to fill out an application and submit documents such as proof of income and the car you want to buy. Once your application is approved, the lender will transfer the money to you or the dealer. You can use it to pay for your car. Rates vary based on credit score and other factors. No markup usually saves even more.

If you want to save money on car loans, pursuing external financing is the best option. That way, you can avoid dealer markups and get lower interest rates even with lower credit. To seek outside financing, simply find a lender and fill out an application. You may have to spend more time finding the right financial institution than if you took out a loan from a dealer, but this could save you thousands of dollars.