How the Finance Department of a Dealership Works
Many assume the dealer has the power to approve or decline loans, and that they actually finance the vehicles.
The truth is - dealers simply arrange the car financing. They work with several banks and are basically middlemen in the process.
It is up to these lenders to determine whether you get approved for a car loan and at what interest rate. These lenders are indirect lenders and will only provide loans through the dealer.
Most car dealers make money on financing by increasing the intereste rate the lender charges and pocketing the difference. This is called "finance reserve" and most dealers will charge up to 2.5% in additional interest, although there are cases where they will raise the rate by as much as 8%.
Dealers are not required to disclose the finance reserve , but you can ask them to show you the approval from the bank in order to see what rate you actually qualified for and whether or not the dealer is charging you extra on top of that.
Most dealers will be reluctant to show you the approval, however, as long as you shop for your own financing before going to the dealer, you shouldn't be ripped off.
If the dealer can beat your pre-approved loan quote, then there is probably very minimal finance reserve added to your loan. Regardless, you should go with the best loan terms you can get whether or not it includes a finance reserve.
The Finance & Insurance Office
The finance department of a dealership is called the "Finance & Insurance Office" (F&I Office), or the Business Office and the person in charge is called the F&I manager or Business Manager.
In addition to arranging car financing, the F&I office is where you will sign all of your DMV and loan documents as well as go over all the paperwork necessary to license and title your vehicle.
The finance manager is one of the best salespeople in the dealership and one of the highest paid - for good reason. The finance office generates a large portion of a dealer's profits.
The finance manager will try to sell you a bunch of additional products and services including extended warranties, paint protection, GAP insurance, maintenance plans, and more.
The finance department typically makes an average of $1,000 in revenue for each car sold at a dealership.
In many cases, a dealership will make more profit through the Finance department than they do from the actual sale of the vehicle.
My Recommendation for Car ShoppersTrueCar No-Haggle and Edmunds Price Promise are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
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