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What is Dealer Financing?

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  • Written By: Felicia Dye
  • Edited By: Heather Bailey
  • Last Modified Date: 23 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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People generally use one of three options when purchasing vehicles. Some pay cash and gain ownership of the vehicle before leaving the dealership. Some people get loans from third parties not affiliated with the dealership to pay for their desired vehicles. Others obtain dealer financing, which involves the dealership helping a person find a loan to purchase a vehicle. It is important to note that dealer financing can exist in other industries, although it is most common in the automotive industry.

The term “dealer financing” is often misleading. It can cause people to assume that a dealership will allow them to take a vehicle after arranging a suitable payment plan. However, this is not how dealer financing works. In such arrangements, a dealership does not directly issue credit. The dealership helps a person obtain credit from an affiliated third party.

In many cases, dealer financing is a last resort. When financing is needed, people are usually advised to obtain it from finance companies or banks that are not affiliated with the dealership where they will purchase their vehicles. Due to poor credit scores, for some people this is not an option.

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Since this is the case, the offers made through dealer financing are usually not as good as those provided by unaffiliated third parties. Many of the businesses affiliated with dealerships are captive financing companies. These are lending institutions owned by a manufacturer that aim to help dealers move their inventory by providing loans. For example, Richmond Dihati, a dealership, may work with Dihati Financing Corporation, a loan provider, when its customers are in need. However, although these businesses have similar names, they are not the same.

The financing companies that dealers are affiliated with are not always captives, however. Some are simply companies that specialize in lending money to people with less than ideal credit. In either instance, these companies realize that a large portion of their clientele have limited financing options. They also realize that lending to these individuals tends to carry a high risk of default. For this reason, these companies commonly charge higher interest rates, which result in customers paying more for the items purchased through them.

Although dealer financing helps many people who lack other options, it does not help everyone who lacks options. Dealers are not obligated to help consumers get loans. Dealers’ affiliates are also not obligated to grant financing to those who apply for it.

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