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
perfect credit.

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:
                                                        Deal at “Buy Rate”      Deal with “Buy-down”                
Purchase Price                                          $11,000                          $11,716                Higher
Down Payment                                           
 $1,000                            $1,000                Same
Amount Financed/Loan Amount                $10,000                          $10,716                Higher
                    
Number of Months                                             60                                   60                 Same
Interest Rate (APR)                                         12%                                 9%                 Lower
Monthly Payment                                       $222.44                         $222.44                 Same
Total Payments                                    $13,346.40                     $13,346.40                 Same
Although your down payment, monthly payments, and total payments are the same and your APR is
lower, are you better off with the
lower APR?

If you keep the loan for the entire 60 months you have lost nothing with the buy down.  But you have
also gained nothing.

However, if you payoff the vehicle before 60 months (due to trade-in, totaled vehicle, or re-finance), the
amount due on an “early payoff” will be higher and you will be worse off.

In this example, paying the
higher APR at the lower loan amount is a better deal.

Summary:

Negotiate the purchase price, the trade-in credit, the add-ons, and the warranty prior to discussing
your credit with the Dealership or allowing the Dealership to access your credit report.  Don’t give the
Dealership an opportunity to “hide” the buy-down in any of these four items.  Know Your Credit Score
and Know Your APR.  
Be StreetSmart!

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