Credit union members and others who go car shopping with a pre-approved auto loan in hand have been shocked when dealers have refused their financing. But can a dealership deny outside financing? Let’s look at what’s driving this trend and consider why car dealers want you to finance through them.
Can a Dealership Refuse My Pre-Approved Financing?
More and more credit unions are reporting car dealerships that are turning down buyers who have pre-approved auto financing. Instead, the dealers are insisting the buyers accept financing through a dealer-approved lender. Dealers have reportedly turned down letters of credit and cashiers checks from buyers who have been pre-approved for financing with their local credit union.
“We have been seeing this happening for a few years now and members get totally frustrated when shopping for a vehicle,” one credit union loan officer reported. “It’s not right that our members cannot finance through the financial institution that they have a good relationship with and trust.”
A massive shortage of new and used cars over the last 2-3 years has put auto dealers in the driver’s seat when negotiating terms of sale. With cars of all types in short supply, dealers are commanding higher prices and dictating the terms of the sale – including how the car is financed. At the same time, dealers need to make their profits from fewer vehicles.
Dealerships have other reasons to have you finance your vehicle through their own preferred lenders. Salespeople can offer you a big discount on the sticker price of a vehicle or promise you an “affordable” monthly payment as a negotiating tactic because:
Dealerships recover the difference (and more) by charging higher interest rates or locking you into a longer term loan than you might have otherwise paid.
Dealerships are often paid bonuses by auto financing lenders competing for loans.
With no obligation to accept outside financing and with these incentives in their back pockets, many dealerships feel confident turning down auto loans that are pre-approved by credit unions, and other lenders, which has caused tremendous frustration for credit union members and staff.
“Some dealers have taken it to the point in which they will tell our members they won’t accept cash!” an auto financing specialist at another credit union said. “Letters of credit are almost becoming obsolete, because more and more dealers won’t accept them.”
What You Can Do About It?
While dealers are currently in a strong position to refuse outside auto loans, there are things you can do to ensure you get the financing you want.
Research the rates and terms offered by several lenders and compare them with those advertised by dealerships. Discuss your plans with your credit union. Ideally you should be pre-approved for financing when you step onto the sale floor.
A powerful weapon in any car negotiation is your ability to walk away if a dealer refuses your outside financing. While you might have your heart set on a particular car, remember that there is a reason the dealer wants to finance the vehicle – they stand to make thousands in profits off of you!
Know Your Refinancing Options
If you must buy a car with dealer financing rather than a loan from your credit union then be sure to take the time to look at your options for refinancing the deal as soon as possible.
Talk to your preferred lender about the rates and conditions under which they would be able to refinance a particular vehicle. Many credit unions offer flexible auto refinancing terms.
Find out whether your dealer financing includes any prepayment penalties for refinancing or paying off the loan. Dealers generally need to ensure a vehicle is financed for a minimum period to receive a signing bonus from a lender.
Best Reward Federal Credit Union Has Your Back
Unlike banks or large car dealerships, member-owned credit unions like Best Reward FCU have no profit targets or shareholder expectations to meet. We are well-positioned to help you secure car financing that meets your needs – not those of a car dealer.
Talk to us about your car ownership plans. We offer:
In many cases, we can help you negotiate with dealerships and can often offer preferential refinancing if you have to take dealer financing to secure the car of your dreams. Click below to learn more.
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