When purchasing a car from a dealership, you might be offered several different ways to finance the loan. One of those options is known as in-direct, which means the loan will be sent to a financial institution rather than being serviced directly through the dealership. This is a convenient way to offer credit union financing at the time of purchase at the dealership. Unfortunately, there can be some information given to buyers that may not be true. Here are a few tips on what to watch for:
Pre-Payment Penalties
Dealers may give the impression that there is a pre-payment penalty for paying off the loan within a certain amount of time, such as 3-6 months. This impression may be false. When a financial institution receives a loan from a dealership, it pays the dealership a fee. In most cases, if the loan is paid off early (within 3-6 months), the dealership must pay that fee back to the financial institution. This is why the dealer may claim there is a pre-payment penalty to discourage the buyer from refinancing the loan elsewhere. However, if you are offered auto financing that actually includes a pre-payment penalty, we encourage you to check other loan options as most don’t have any pre-payment penalties.
Multiple Credit Inquiries
In an effort to find the best loan terms, dealers may send or “shop” the loan to multiple institutions for review which results in many credit inquiries. Unfortunately, this can cause a drop in credit score for the buyer. We encourage buyers that utilize the in-direct financing ensure they know who the dealer will be contacting and who will be pulling credit. Buyers should be specific on which institution they’d like to get the loan through and not allow the dealer to “shop” their loan resulting in many credit inquiries. You have the right to know who is pulling your credit so we encourage you ask the dealership about who will be pulling your credit report.