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Car dealerships have the right to refuse your outside financing, and they don’t need a special reason to do so.
Although legal, the practice can be frustrating for buyers who don’t want to be forced into dealer-arranged financing, especially if they’ve already been preapproved for an auto loan with better rates.
Why dealers refuse outside financing
Dealers often refuse outside financing simply because they can make money off of dealer-arranged financing — sometimes to the tune of thousands of dollars in profit.
Some dealerships will decline outside financing outright — a practice fueled by the shortage-driven car market, with dealers trying to squeeze higher profit margins out of their dwindling inventories.
Other times, they’ll turn down outside financing if you’ve negotiated down the price. To make back that lost money, they’ll insist that you use dealer-arranged financing.
What to do when a dealer refuses outside financing
Using dealer-arranged financing isn't necessarily a bad thing, and many people finance their vehicles through the dealership.
However, the only way to know for sure that you’re getting a good deal is to compare rates for auto loans and get preapproved for one before you head to the dealership. If the dealer can beat your preapproval offer, then you’re in a great position to continue negotiating.
Ultimately, if the dealer’s terms don’t make sense for you and they refuse to budge, walk away. Buying a car is a major purchase, and you don’t want to get locked into a bad deal.
You can also shop around at other dealerships to see what they’re offering. You may find one that has the same vehicle on the lot without the financing restrictions.
Consider refinancing to avoid dealer-arranged financing
Given the car shortage, it may be hard to find the car of your dreams on the lot. So what happens if you’ve found it at a dealership that refuses outside financing but offers terrible terms?
Some buyers have reported using a loophole: accepting the dealer-arranged financing, then refinancing their auto loan elsewhere at a lower rate.
Dealers lose out on their commission for financing if the loan is paid off within 90 days. Whether you choose to refinance in that period depends on how you feel about the sales experience and how quickly you can arrange a refinancing loan.
Before you go this route, confirm with your prospective lender that the same rate you were preapproved for would still apply to a refinance. You’ll also want to read your dealer-arranged loan agreement carefully and understand any penalties, such as an early termination fee.