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Car dealers make lots of money on the ‘back-end,’, meaning financing,insurance, extended warranties, and other add-ons. This is often called the F&I (Finance & Insurance) department and the salespeople here are called ‘Business Managers.’ In most cases the Business Manager is the real salesperson since dealerships often make more money here than on the sale of the car. Be careful not to let your guard down yet, they are counting on the euphoria of your taking ownership of your new car overriding your good common sense. After signing up for their new car, many people often go into ‘yes’ mode.

Financing
When you buy a car, the car dealership will send your credit information to the different banks and lenders it does business with. Along with an approval the banks will send back the dealers ‘buy rate’ for your loan. This is the lowest interest rate the bank will offer for your financing, but the dealer can mark this up significantly.

Let’s look at an example. Let’s say you need to finance $15,000 for five years and the buy rate is 9%. That financing would end up costing you $3,682 over five years. But if the dealer marks it up to 13%, it will cost you $5,477. An additional $1,795 that you pay and the dealer keeps.

So what can you do? Shop a couple of banks and online services before you buy to see what their rates are for car loans. Pay special attention to the term and total amount you can finance. For instance some banks may offer low rates but only for shorter terms like 36 or 48 months. While shorter terms save you quite a bit on interest, they also significantly increase the monthly payments. Also some banks may require a substantial down payment to qualify for their lowest rates. You’ll want to find out what is the lowest rate you can get at the term you want for the amount you need.

Now when you ask what rate the car dealer can offer (and you must ask); if you can do better, tell them. You may find that they will lower the rate to meet or beat what you can get at your bank. If not, don’t finance with the dealership, use your bank. Remember, a 1% difference on a $20,000 — 5 year loan is about $600, and that’s your money!

Extended Warranties
These generally fall into the same category as life & disability insurance policies: an opportunity for the dealer to make more money that you should pass on. All new cars today include at least a three year manufacturer’s bumper-to-bumper warranty. If you want the protection of an extended warranty, keep in mind that you can shop around for these too. There are companies like Warranty Direct that offer warranties for much less than you pay at the dealer. Do some homework here. Get a quote for a warranty online and then compare.

Insurance
Life and disability insurance is another opportunity for the Business Manager and the dealership to make more money off you. The sales pitch is that you should protect your new car, yourself and your family with this insurance and it will only add a few dollars a month to your payments.

The Business Manager may try to slip this past you by simply including this in any payments you are quoted. Then they will just breeze past it as something that everyone does. Sometimes they may even make you feel that not taking the insurance will jeopardize your financing by implying that the bank wants you to have the insurance. My advice: pass on this insurance. You may even already have coverage through an existing policy that you have. If you feel compelled to insure yourself for life and disability, get a comprehensive policy through your insurance agent.