#auto loan rate
BUYING DOWN THE APR
The interest rate ( APR ) on a car loan can be bought down by a Dealership just like a mortgage
interest rate can be bought down. Is the lower rate worth it? Is this a good deal?
Although many are aware that a mortgage interest rate can be bought down, most are not aware that
a car loan s APR can be bought down. Frequently, the buy down of a car loan s APR is hidden . The
buy down of an APR for a car loan is usually not in the best interest of the customer. Here s why:
A mortgage rate buy-down:
If you are considering a fixed rate mortgage, lenders may offer you an opportunity to get a lower rate
for an extra up front payment (lower the rate by 0.25% in return for an additional 1% up front). The
mortgage company is assuming that you will be in your home for less than 5 years (or may refinance
your loan in less than 5 years) while you believe you will be in your home for longer than five years
(and will likely not refinance your mortgage), perhaps planning to be in your home for as many as 10
years or more. Since you plan to borrow the money for a longer period of time than is assumed by the
mortgage lender, a buy down may be in your best interest. The up front amount is essentially
prepaid interest . You will fully recover this prepaid interest in less than five years.
A car loan buy-down:
A car loan buy-down is different. The finance company is usually assuming that on a 60 month car
loan you will have your car loan for the entire 60 months. Since you may be in your car loan less than
the full 60 months (examples: you decide to trade-in the vehicle after 3 years, your vehicle is totaled
after two years, you decide to re-finance your vehicle at a lower rate after 2 years, etc.), a buy down
will not help you. Do you really want to incur the cost of prepaid interest ?
More importantly, the buy-down may not be disclosed to you. The buy down is often hidden by the
dealership in order to appear that their financing rates and programs are better than the competition.
(The fact is that most Dealerships are using the same or similar lenders and have access to the same or similar
interest rates. Finance companies compete for Dealership Business by offering competitive rates.)
While a lower APR sounds attractive, who pays for the buy-down? You do! It could be in the form of a
higher purchase price, a lower trade-in credit, etc.
This occurs most often when dealerships arrange loans for customers with less than
Let s assume you have a credit score of 620 to 660, indicating some limited to moderate credit risk to
a lender. The Dealership knows by reviewing your credit report that you do not qualify for the best
rate available. The Dealership knows from talking with you that a good rate is very important to you.
The dealership knows that the best buy rate available for you is 12%, however, if the loan is sold at
a discount of $716 to the finance company, they can lower the APR to 9%. In other words the loan
has an initial amount due of $10,716 but the dealership will only receive $10,000 when they sell the
loan to the finance company. How does the Dealership come up with the additional $716 they will lose
on the sale of the loan? Answer:
The Dealership will require a higher purchase price, a lower trade-in credit, over priced add-ons, an
overpriced warranty or any combination of these four items. This is why it is important to negotiate
these items prior to discussing your credit situation.
Let s look at an example: