Most people don’t know that, when you get your auto loan financing from a dealership, the dealer typically makes a commission on your loan, and that commission is often secured by adding a markup to your loan interest rate.
That means, if you got your financing through your dealership, you may actually qualify for a lower rate and lower monthly car payment than what’s on your current loan.
Looking for the long version? Find out more about dealership financing, how to check whether your rate is higher than it needs to be, how to get a lower rate, and more frequently asked questions about car dealership financing with this guide.
Understanding dealership financing, and especially how interest rate markups work, can save you hundreds or even thousands of dollars over the life of your loan.
In this guide, you’ll find:
Everything you need to know about dealership car loans
How to know if you got your best available rate for your vehicle
How to get a lower APR (annual percentage rate)
How to decide if refinancing makes sense for you
FAQs about dealership financing
Read on for all the answers to your burning questions about getting your auto loan financing from your car dealership.
In this section:
What is dealership financing?
Do dealerships make money on financing?
How do dealership rate markups work?
Is dealership financing always a bad idea?
What to watch out for (and how to get a better rate)
Let’s dive in.
Dealership financing, sometimes called dealer-arranged financing, is when you get your car loan at the car dealership when you buy a car, instead of separately from a lender of your choice.
Dealership financing is almost always indirect financing, meaning you’re not actually borrowing from the dealership and paying them back, you’re getting a loan from a lender through the dealership.
The only exception to this is “Buy Here Pay Here” lots, where the dealership is your lender, but they’re generally considered a last resort option and target individuals with bad credit.
In short: Yes, they do.
The margins on simply selling vehicles tend to be pretty thin, so dealerships make money through their finance office on:
Interest rate markups
Add-on products (extended warranties, GAP insurance, etc.)
Lender incentives and commissions
You’ve probably been asked, "Are you paying cash or financing?" —and if you’ve noticed that there can be pressure to choose financing, there’s a good reason. It’s because added charges and markups like these can add thousands of dollars in profit to a single car deal.
However, you are very much allowed to get financing elsewhere to secure a better rate.
The lender offers a buy rate: the rate you’re approved for based on your credit and finances.
The dealership offers a sell rate: the rate they offer you on your loan.
The difference between the two is often called the dealer’s reserve.
For example:
The lender offers you 5.49% APR (buy rate)
The dealership gives you a contract where your APR is set at 6.99% (sell rate)
The dealership and the lender split the 1.5% difference (dealer’s reserve) as profit
Lenders typically set a maximum percentage amount for the difference between the buy and sell rate, usually between 2% and 3%.
Not necessarily! You may be able to get a manufacturer’s promotional rate (like 0% APR offers) through the dealership, and it’s certainly convenient to get the financing done when buying the car.
If your credit or financial picture is a little shaky, you may not qualify elsewhere. Or, if you know what rate you might qualify for, you can negotiate with your car dealer—they may be willing to beat or match other rates.
Watch out for offers presented as lower monthly payments that simply extend the loan term: you’ll pay more overall because of the interest payments
Negotiate on the total cost, not just the monthly rate
Walk in with a pre-approval in your back pocket to give you a benchmark for what you should be paying and more leverage in negotiations
Most people who got dealership financing are eligible for lower rates.
Here are some quick numbers:
Analysis by MIT found that 78% of dealership loans carried marked-up interest rates as of 2023
Trans Union found that almost a quarter of open auto loans in the U.S. have current loan rates that “exceed the prevailing average APR,” meaning at least 18 million borrowers are eligible for a beneficial refinance right now
Experian’s State of the Automotive Finance Market Report found that the average refinance customer saved 2% on their APR through refinancing as of Q4 2025.
In short? The best thing you can do is make sure you know your current APR, then shop around to see if lenders are offering lower rates than you’re currently paying. You can get a quote with a soft credit inquiry to avoid a hit to your credit score, then decide if you want to proceed.
Now you know that dealership financing typically comes with rate markups. So, how do you get the rate you’re actually eligible for?
Get pre-approved for bank funding before you buy a car, and/or negotiate your rate at the dealership. Remember, you don’t have to take the first deal they offer. You can negotiate on the rate the same way you’d negotiate on the car price and loan term.
While some lenders will renegotiate an existing loan (and it’s always worth asking), if you want to change your loan terms, you’ll probably need to refinance your car.
Refinancing is when you pay off your old loan with a new loan. It’s typically done to change some part of the loan terms, like:
To get a lower APR
To lower your car payment
To shorten or extend the loan term
To add or remove a co-borrower
Refinancing is generally a good idea if:
Your loan is not very new or very close to its end
You’re eligible to lower your rate—because rates have gone down, you got a marked up rate, or your credit or finances have improved
Or you want to make one of the above changes—like paying off the loan sooner or lowering your payment due to budgetary concerns
Want to find out if you’re eligible for a better car loan APR? Get a quote from Auto Approve today. It’s free, there’s no commitment and no hard credit check, and it only takes a minute.
Still got more questions? Tl;dr? Here are a few of the most commonly asked questions about dealer-arranged financing.
What is dealer reserve?
How much is dealer reserve?
How common are rate markups?
Are dealer rate markups legal?
Can you negotiate on your interest rate when buying a car?
Dealer reserve is the name for the difference between the loan rate a lender approves for you and the actual loan rate your dealership offers you. The extra interest on top of the rate you qualified for is split as profit between the lender and the dealership.
A 2023 MIT study found that dealer-arranged loans had an average markup of 1.13%. Caps on dealer reserve are usually around 2 or 2.5%, but vary by lender and loan term.
Analysis by MIT found that 78% of dealership loans carried marked-up interest rates as of 2023.
Yes, they are generally legal, although they have been heavily scrutinized for lack of transparency, especially with regard to how discretionary markups are applied differently to protected classes (i.e. based on race, gender, religion, national origin, or disability).
You can and you should! Your interest rate is negotiable and you do have other options if you’re not offered a good APR.
Auto Approve has your back. And, when you find a better rate, we’ll even handle the paperwork for you. Get your free quote now.
