The search is over. You found the right car, at the right mileage and in your price range on a local lot. You’ve taken the car for a test drive. It’s been inspected. You negotiated an acceptable price. Now you find yourself in the finance and insurance manager’s office.
Finance and insurance games
In Pennsylvania and other states, you need to sign a whole raft of documents for purchase, warranty and most importantly finance before you officially own the car. Many car dealerships have strong policies for fair and ethical lending standards. On the other hand, some do not.
As a savvy and prudent customer, you need to be properly prepared for this stage. You must know your FICO credit score. You can research your loan APR online, at a bank or credit union.
This research will reveal your best rate for the loan. The FICO agency bases your credit score on at least 10 years of history. It’s pulled from many reporting agencies and gives businesses an indication of your credit worthiness. Will you repay the auto loan? How big of a risk are you?
FICO credit score range
FICO measures your credit risk according to the table below, and it will dictate the loan rates or APR percentage points on the auto loan. The higher your FICO credit score is, and the lower the interest rate on the loan.
- 800-850: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 300-579: Very poor
Dealer reserve option
If you don’t know your competitive loan rate, the dealer’s F&I manager can take advantage of you. The manager can offer you a slightly or significantly higher APR for your auto loan. This is called dealer reserve. The manager adds a quarter, half point or more percentage points to the interest rate.
Many buyers simply accept the loan rate because they don’t realize they qualify for a lower rate. The unsuspecting buyer is essentially paying a commission or extra amount on the loan, and it goes into the dealership’s coffers.
While dealer reserve is not illegal in the state of Pennsylvania or most other states, it is a not transparent and certainly questionable business practice. But keep in mind, it’s not the only dubious lending practice that a dealer can use. You need to know your FICO score and lending rates according to your FICO score. When you have this information in hand, you are armed with the knowledge to get yourself the best deal.
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