The goals of car dealers and customers are not aligned – duh! The goals are not aligned for the car as well as the car loan.
The best car to buy for the customer is not the best car to sell for the dealer. Similarly, The best car loan for the customer is not the best loan for the dealer. In fact, the best loan for the dealer may well be the worst one for the customer.
The car loan dilemma at the dealership
When Chris and I started Carlypso, we went out to “change the way used cars are being sold”. We had big ambitions to make cars cheaper, be more transparent and treat customers well. Three years down the road, we found ourselves presented with an unanticipated dilemma:
Our client Joseph ordered a 2014 Cadillac CTS from us and planned to finance $33,550 over a term of 72 months. Fortunately, we work with 112 different lenders and can take care of the entire loan origination and funding process on behalf of our customers, just like any reputable dealership.
Two lenders approved Joseph for a loan. When I asked him which bank he wanted to move forward with, Joseph responded: “oh, your colleagues said they’d look for a good loan and choose on my behalf”.
|Traditional bank||Credit Union|
One car loan was approved by a traditional bank and the other one by a Credit Union. Which loan was I supposed to present to Joseph?
The loan with the traditional bank had a higher interest rate but the bank was willing to pay us a $1,594 referral fee. The Credit Union car loan was clearly the better choice for Joseph but would only pay us $335.
Should we pocket the extra $1,259 and make more money from the loan referral than on the actual car?
The dealer is the gatekeeper to the best car loans
60-80% of cars are financinced and especially in the mid-market segment, i.e. FICOs between 600 – 700, we’re observing very low rate-transparency. Different lenders have different ‘charters’ and the financing manager at the dealership typically chooses the car loan on behalf of the customer.
Let’s look at a range of alternative car loans for a customer in Los Angeles (see Los Angeles County Credit Union Rates and Advice) with a credit score of 610, who plans on financing $33,500 over a period of 72 months:
For the customer, the First Entertainment Credit Union loan would offer the lowest rate at 8.15%, which translates into a monthly payment of $591. The Credit Union would pay the dealer a $671 referral fee.
For the dealer and the financing manager, however, the CapitalOne loan looks much more compelling. The dealer would receive a referral fee of $1,977 for the loan referral.
The ‘Dealer Optimal’ car loan and ‘Customer Optimal’ car loan are rarely aligned because of compensation structures and information asymmetries.
You may be asking yourself: what does that mean for me?
How can a customer ensure she’s getting a good car loan?
The answer is pretty straight forward: don’t let the dealer choose your loan. Easier said than done, I know.
Car shoppers typically focus their search on finding the ‘perfect’ car. Rarely do customers search for the right loan in parallel or they simply don’t know of the low rates Credit Unions offer on car loans.
Fortunately, customers have three chances to choose the perfect car loan and it’s never too late:
|What you can do|
|While at the dealer||
|After the purchase||
How to get the best car loan?
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