How Do Car Leases and Loans Work?
How Do Car Leases and Loans Work in Los Angeles?
Before going in to a dealership to lease or buy a car, it is important to understand how leases and loans work.
The important key to keep in mind is that car dealers do not finance auto loans and leases. They do, however, affect how you finance and the interest rate you pay for financing.
How Car Dealers Profit
Dealerships are essentially small businesses who sell cars for cash. They have authorized franchises with the car manufacturers, but they do not work for the car manufacturers. They purchase the cars wholesale from the manufacturers with large “floor-plan” loans from a bank or finance company. The bank then charges interest on those loans, and the dealers sell cars to pay off those loans with interest.
Dealers Are Not Bankers
Dealerships do not have a loan or lease department. They do not directly finance the cars they sell or lease, and they do not approve loans They can, however, check a customer’s credit score. They have preferred finance companies or banks that they partner with to arrange financing for customers. Once the financing has been approved and arranged, the dealer is paid.
Dealers Can Pre-Approve Financing
A dealer can determine whether a customer has serious credit issues and will not be approved for a loan. This is done through a credit check. The higher your credit score, the better your interest rate. If your score is below 620, you will probably have difficulty getting approved for a loan or lease. If you do get approved, your interest rate will typically be extremely high.
Dealers Can Adjust Your Interest Rate
One of the potential “hidden” fees when financing a car is a markup that dealers can add to your interest rate, even when you have a good credit score. This called “dealer reserve” in the auto industry. This is why it is important to know your credit score and shop around for the best interest rate.
Changes Can Be Made to the Lease Contract
When you ask the question how do car leases and loans work? It is important to know that once you have signed the contract, the deal is not done yet. The loan has to approved by the bank or finance company so that the dealer can be paid for their car. Otherwise, the car may have to be returned to the dealer or a new contract may have to be signed.
What Can You Do if You Have Poor Credit?
It is your responsibility to know your credit history and credit score. You can a free credit score with a paid credit monitoring trial from TransUnion.
You can also ask the dealer if they work other banks or finance companies who may be willing to approve the loan.
You also have the option of shopping for your own car financing at a bank or credit union. There are also online loan companies that provide auto loans to people with poor credit.
So how do car leases and loans work? Although the concept can be a bit tricky, we have broken it down so you can understand the basics. Being knowledgeable will save you money and allow you to avoid costly mistakes with your next car purchase or lease.